Thanks very much for coming to our presentation, which is the Ashmore Group plc's results for the full year, ending 30th of June, 2023. I'm Mark Coombs, Chief Executive, Tom Shippey, Finance Director. I think you know us all. The only bit of housekeeping is, when you want to ask a question, you have to pull the mic out of your chair, press the button down, and talk, otherwise, nobody hears it. Okay, onto the meat of the matter. So here's an overview of how we've done in the year. So EM actually did pretty well in the year, certainly compared to what some of the things that were going on elsewhere.
The indices, in terms of equity and bond markets, were up 2% in the case of Equities and 11% in the case of Local Currency bonds, so pretty good last 12-month performance. As you would expect, given what's going on in developed markets, the growth premium in GDP terms is getting wider, from the benefit of EM against developed markets. And the sort of state of play as we reach the beginning of this financial year, sort of July, August time, is we're finally getting around to some stimulus from China, which, of course, is the elephant inside everybody's front room. And we're getting both fiscal and monetary stimulus. They've finally got themselves organized mid-year, for us, January time, to relax COVID.
But they've got a problem with consumer confidence, and the only way really to fix that is to deal with what's happening in the youth sector and get some kind of consumer growth. And that's really what they're working through. I think they finally got the joke. I think the trouble with being a very centralized economy is sometimes it takes time for the guy at the top to be told by everybody who doesn't want to upset him, that things really aren't going as well as he thought. But I think they've got the joke, and I think we've seen some sensible stimulus, and I think the key question now is how do they get that to feed down, ripple down into consumer confidence? And obviously, all the markets are waiting for that, both equity and bond markets.
Elsewhere, in EM in particular, we've had pretty good monetary policy management from most countries. I mean, even in Turkey, we've now got somebody relatively sensible. No, he's sensible, sorry, sensible in charge of the economic policy. But in the rest of EM, we really had a situation where they got ahead of it. You know, they're used to inflation. They've seen people's governments change very rapidly, and so central bankers got ahead of it and raised rates pretty quickly, got inflationary expectations anchored, and are now cutting rates in EM. Where does that leave us in terms of the investment side of things? We're at where we would expect to be at this point in the cycle. Now, happily, our investment strategy continues as it always has.
We've made the investments we wanted to make through a pretty aggressive couple of years in terms of the markets, and we've now got investment outperformance ticking up nicely across all periods, and we're now up to 69% of assets outperforming over 1 and 3 years, which is getting to a nice level. That will continue to improve, and that's all good, but what it, what it means is that's a trigger for clients to say, "Oh, this is fabulous. Maybe we should be buying a bit more of this." But it just takes them a while. Retail can be quicker, but institutional, it takes them a while. So as you all know, that's a one- to two-year period in terms of lag, typically. So as a result, financial performance lags as well.
Where we are in terms of assets under management, we're 13% down year-on-year at about $56 billion. Our opening AUM was below the prior year average, so obviously, that has implications for our P&L because it's driven off AUM, as you know. So where does that leave us in terms of the way we manage the business? We keep doing what we're doing. We have discipline and cost control. But at this stage in the cycle, we say to ourselves, well, the financial performance is where it is, but investment performance is very strong. It's important that we incent the people who are performing, who are managing the clients, and are doing good jobs across the business, any function. And so for that reason, we've increased the compensation percentage to 25%, which is where we'd indicated our maximum would be in the past.
So it's up at, the variable compensation pool has been increased to 25%. It's a down percentage in total terms, in absolute terms, but it's up just in percentage terms in terms of what we said we would be doing. So that brings us to an Adjusted EBITDA of down, down 35% year-on-year, GBP 106 million. Still a very high Adjusted EBITDA margin of 54% and strong cash flows at GBP 112 million. So the business is still performing well, and then where that leaves us is our balance sheet is still very strong. We're able to continue to invest in seed capital. We can invest in people. We can invest in all kinds of things, and we like to do that. Our EPS is down 4%, our diluted EPS, 4% year-on-year, but we've maintained the dividend.
So the way that we go from here, we still obviously completely believe in what we do. We, the long-term growth in EM is still structurally good, and we're looking at this point to actually being at a point where we think we're due for a nice cyclical upswing. Assets are pretty heavily undervalued, particularly against DM, but even in absolute terms, and we like that. What this typically means is, as we go through the end of this year, we probably have a pretty strong couple of years after this, which is great. So we're at a very good time and a good, if you like, a good point in terms of lift off for that. As I said before, the fundamentals are getting better in EM. Inflation is under control.
Rates are therefore in a downward trajectory for the bigger and more sensible ones. China is now stimulating, and we've got GDP growth support. So there's plenty of places to invest, too. So we have opportunity both in rates markets, but also in Equities markets, where we think significant lack of value compared to DM. I mean, you can... There's some of the bubble DM stuff that we're not trying to compare ourselves with in terms of bubble AI and stuff like that. But in terms of fundamental businesses and cyclical businesses, there's big opportunities in EM... equity. Then the only last point I would make here is that there was still pretty heavy risk aversion from institutional and retail investors through the calendar first half of 2023. Still people sort of saying, "Oh, I don't know what to do. Oh, crikey, I better run to cash. If U.S.
Rates are going up, yeah, I get paid a bit more of my cash, I should run to cash. So generally being nervous, a few people chasing a few things that were hot, like the AI story, and that thing tends to run out of gas relatively quickly. From here, I think the relative attractions of what we do should have greater influence. That sort of flee to what's seen as low risk, that's sort of tailing off. Maybe a little bit of it left, but not so much. We'll talk a bit more about that as we go through it. So EM, the cycle is turning in terms of investment performance, but also in terms of economic performance, and you'd kind of expect that, I think. But as I mentioned before, market returns have been good.
For the year, they've been positive. Spreads have tightened a bit. Fixed income markets have had strong returns. Equity markets were weak in our first financial, so the sort of September 2022 period, our first financial half, Q or quarter, but then had a very strong recovery through Q2, Q3, and Q4. If you look to the right, that gives you some idea of asset class returns. This is just indices, just to give you a flavor. So the first three categories are fixed income, external debt, which is dollar-denominated sovereign debt, Local Currency, which is Local Currency-denominated sovereign debt and FX, and Corporate Debt, which is Corporate Debt denominated in dollars or hard currencies, we would say. As you can see, full year returns from 5%-11.5%, so all positive.
Equities, I mentioned, had a not great first half, along with some other equity markets around the place, but ended up +2 despite that. And on developed markets, global bonds suffered a bit, particularly around rate rises. So again, the place to be if you're in bonds was in EM, not in DM. And global Equities did pretty well in the second half around, yeah, the sort of bull run around some of the technology assets and some other things going on there. So where are we in terms of fundamentals? Why are they improving? Well, I said monetary policy sort of dealt with inflation in terms of inflation expectations. Nobody wanted to change the government, so that, that worked out pretty well. Real rates are pretty high now, in fact, too high.
So the easing cycle has now begun in several countries, which is a positive thing, obviously, if you're in the right part of the curve for bonds, and we think we are. China's getting around to stimulating, which is going to be broader ripple across the world, and the GDP growth premium is back and expanding quite significantly. Investment performance summary, I always talk about this, so as we would expect, our investment processes are outperforming at this stage in the cycle, and that should continue nicely for a couple of years. What we do here is we break out one, three, and five, as we always do. If you look at one year up to 67%, we were up 45%, six months, a year ago. Three years, 69 against 28, and five years, 49 against 48.
That ripple through takes a little longer because it's further out. The highlights of this, we're generating significant outperformance here, which we should do. It's typical. It's what we do. Very strong alpha in External Debt, Local Currency, Equities, all investment grade, not quite where we want to be yet, Corporate and Blended, partly because Corporate fits into Blended in certain places, but getting there. As you can see, Blended is now up over 60, and Corporate is currently the only lagger. Only in the high yield space. Corporate investment grade, doing extremely well. As a result of this, I think client engagement is picking up. The whole, "Oh, my God, hide behind the sofa," there's still some of that lingering, but people are starting to think now about, Well, where do we go from here?
We've had quite a lot of traction in, well, I guess two or three places. We've finally had some traction in Local Currency bonds. People often get pretty nervous about local currencies and say: Oh, dear, you know, isn't the U.S. dollar always fabulous? I think they're figuring out the U.S. dollar isn't always fabulous. So, we're starting to get some interest there and some inquiries around that space. Within investment grade, we've been able to make a pretty good case, supported heavily by the data, that if you want to be just an investment grade investor, you shouldn't just invest in the WGBI.
If you do an allocation of part of your exposure to what goes on in emerging market, dollar-only investment grade paper, it's a significant alpha contributor over all periods in history, actually, and a good diversifier. So we're actually getting some traction in that, and we're now starting to see... I've got a finals pitch next week, so that's all beginning to next month, sorry. So that's all beginning to pick up. Exactly where you'd expect as people come back and go, "It was all terrible. Now what am I going to do? Is America expensive? What am I going to do?" People are making, I think, having those thought processes. Equities performance also been very strong, and we're seeing we're now kind of all over the consultants' radar on those things.
We've been doing it for a long time now. We've got teams that are performing. We would expect to turn some of that into assets. So a bit more client action. So how do we think about capitalizing on that, you know, as Ashmore, right? So yes, if we're right, emerging markets have superior growth, and now we've got reforms and diversification going on. Which is fine. That's always been happening, but it's happening better. I've touched on the GDP point. There are more than 70 countries, so we can move around between them quite happily. But there's still a big factor is that it's 72% of the world's FX reserves and 84% of the population in emerging markets. Global index weights are between 10-30, so it's structurally underinvested, and that gap we expect to close.
Where does, how do we think about that in terms of our strategy and how we run our business going forward? We’re set up to deliver meaningful assets under management growth in each phase of our business. We feel pretty comfortable that the long-term growth from steadily increasing allocations will happen. The last year, there’s been a trade down in that, but it happens. That’s exactly what happens. Institutional retail says, “Oof,” and they get a bit nervous, and then they spin around when they start seeing overconcentration in the home market can hurt them as well as benefit them. So that structurally, people getting moving that 10-30 up is going to happen. And a lot of people are not even at 10-30.
So we that structural story, which is, well, why haven't you got more money there? Is still gonna be there as long as you deliver the returns. As you can see, the markets we're delivering. So for example, bond markets deliver better returns in the last 12 months. And people finally get that joke. Our job is to make sure we maintain the people to talk to them, to keep selling that story. The second stage, which is diversify through growth in Equities, broader in Alternatives and deeper retail penetration. Retail is still pretty negative. We're sort of starting to see a little bit of interest now in the equity space in retail. A lot of retail is sitting on cash or buying very expensive U.S. equity.
So we've sort of started to see a little more engagement just coming out of the August period. We've actually started to see some conversations, especially around equity. Conversations are going on all the time, but in the bond space, they're kicking on as well. So that's good, but it's sort of a relatively... This is cyclically where we would expect to be the low point in the cycle for retail, so we'd expect that to improve from here. Institutionally, as I say, we're getting the message out. We feel pretty comfortable that we'll convert some of that into flow in the next 12 months. And then the local business, which is phase three, those businesses, they're doing pretty well. They're doing what they're supposed to do. They're different from each other. They're different from the global business.
Yes, in total crisis, everything correlates to one, but as soon as there isn't total crisis, and we're now not in total crisis mode, we're now in where do we go from here mode, which is a different state in the markets, they benefit from lack of correlation. And so actually, through the year, we added $1 billion of assets within the local businesses, which is what we would expect to do, even in a not great market. They are nice businesses in economies that are big, that are gradually growing their asset management platforms. So that was a good thing. So then what do we think about this in the context of our business model? So we're pretty comfortable that it stays as it is. It adapts, it's very adaptable, it's built for that reason.
So we have a scalable platform. We want to keep having that. We're happy with the platform we've got. At various points in time, we'd expect to add other local businesses where it makes sense. But meanwhile, the central business, if you like, the global business has a well-established platform. We continue to want to build that and grow that as makes sense. It's a pretty efficient business model. I think you'll agree, we deliver very high EBITDA margin relative to the industry, and we plan to keep doing that. That's what we want to be doing. We think we can be a high EBITDA margin business. So that's a positive thing that we want to keep when we look at our business. Cash generation is meaningful. We like that. We maintain a strong liquid balance sheet. We want to keep doing that.
Let's us invest for future growth in terms of seed. It's also getting now increasingly profitable. So all the money we've earned over the years that we've, that we continue to earn in terms of generating profits of what we do, we're now getting paid to have that money, which is nice. And then what we think we do very well is align our employees through the cycle with a pretty flexible remuneration structure. Through the year, our operating costs actually decreased 4%, which I think is a pretty good achievement in the year that we've had, particularly given all the background in terms of global inflation, et cetera. And we have a lot of employees here. We've had pretty strong inflation.
As a result of the fact that, investment performance has started to improve really quite dramatically, which is great, but financial performance lags, we increased our bonus pool, as I said, to 25% against previous indicated, maximum, which was that level. That's actually a 24% absolute reduction, which obviously gives you challenges, but we've, we've managed to deal with that quite comfortably, as we always do. The way we think, I think going forward, that lag of financial performance against investment performance means that we have to... The way I sort of think about what's going to happen in the year ahead, I can see a couple of things probably happening.
First off, the fact that we have a balance sheet that's now generating significant returns, that should form part of how employees are remunerated to maintain the balance between shareholders and employees. But secondly, I can see that at this point in the cycle, the range in the past that's been sort of 14, well, 11, actually. Well, Paul and I always argue about this. I think the lowest point was 11% of the number, but I think it might have been just before we were listed. But between 14% and 25%, the way I think about that range now is it could go up to 35% as necessary. It won't always, but it could do. It gives us the flex to continue to build the business, keep the people who are performing paid as they should be.
We still intend to stay a very high-margin asset manager. That's very important to us, so we've no intention to be low margin relative. We don't want to drop to the industry levels. And remember, all employees are also shareholders, so it's in all of our interests that we own as many shares as we can, and that we improve the business and the value of the shares over time. And because it's always a balance, that's part of the reason that we say, well, it makes sense that we maintain the dividend so that everybody's getting the right sort of levels of returns from the business, both shareholders and employees. I think that's it for me for the minute.
Happy to begin. Perfect. Thanks, Mark. First of all, let me run through a high-level summary of the financial performance for the period.
As Mark mentioned, assets under management declined by 13% over the 12 months to $55.9 billion, with positive market and investment performance in both the first and second halves, offset by net outflows that moderated over the 12-month period. As I'll describe in more detail, given the fall in assets under management following the outbreak of war in Ukraine in 2022, the opening level of AUM was more than 20% below the average of the prior year, presenting a meaningful revenue headwind. Consequently, adjusted net revenue fell by 24% year-on-year. As you'd expect from Ashmore's business model, in this revenue environment, adjusted operating costs declined by 4% through a significant reduction in the variable remuneration paid to employees, more than offsetting the impact of the inflationary environment and a weaker sterling dollar rate on reported costs.
While Adjusted EBITDA was 35% lower year-on-year, the margin of 54% remains at a high level relative to the industry, and the group generated GBP 112 million of operating cash flow. Over the 12-month period, seed capital investments delivered a mark-to-market loss of GBP 8.3 million, significantly improved from the approximately GBP 50 million pound loss last year. There was a meaningful turnaround in the second half, with a mark-to-market profit of GBP 8.2 million, consistent with the recovery of markets. As you know, the group maintains a substantial cash balance, and therefore, the increase in interest rates towards more normalized levels has generated significantly higher interest income this year of approximately GBP 16 million.
As a consequence, profit before tax reduced by 6% to GBP 111.8 million, and diluted EPS was 4% lower year-on-year. On an adjusted basis, excluding seed capital losses, diluted EPS fell by 32% to 12.7 pence per share. As Mark mentioned, the board fully understands the importance of the dividend to all shareholders, and therefore, notwithstanding the slightly lower statutory profits, has recommended an unchanged final dividend of 12.1 pence to give a total of 16.9 pence per share for the full year.
Looking now at assets under management, the movement over the year was driven by the following key themes: First, the rally in markets that Mark described, with fixed income indices up by 11% and Equities up by approximately 2%, combined with Ashmore's strong relative performance, particularly in Local Currency, Equities, and investment-grade strategies, delivered an increase in assets of $3.4 billion. Secondly, however, continued risk aversion, particularly from institutional investors in the developed world, meant that while lower than the prior year, overall net outflows were $11.5 billion for the period. And third, a notable improvement in the second half, with higher performance and lower net outflows as markets continued to rally from the lows of September 2022.
Gross subscriptions of $7.2 billion were lower than in the prior year, both in absolute terms and as a percentage of opening AUM. This is consistent with the theme of subdued investor at-risk appetite, although there were new client wins in Local Currency and Equities and some early adopter behavior evident in external debt. Gross redemptions reduced by 30% year-on-year to $18.7 billion. This continues to reflect the institutional de-risking theme, with certain investors concerned by the rising interest rate environment, the war in Ukraine, and ongoing geopolitical tension elsewhere in the world, and can be seen, for example, in the reduction of the proportion of AUM from clients based in the Americas, from 19% at the start of the period to 13% at the end of June.
Ashmore's strategy, as Mark mentioned, is designed to diversify the group's revenues and thereby mitigate the impact of market cycles. The focus is on growing AUM by targeting Equities in the local asset management platforms, by building scale in the investment-grade fixed income strategies, where we continue to see good demand, in particular from Asia and from the intermediary retail channels as risk appetite improves with the upswing in the current cycle. The benefits of this approach were seen in several key areas this year. Notably, in contrast to developed world investors, Ashmore's clients in the emerging markets demonstrated a greater risk appetite for the investment opportunities available. AUM from this group increased by over $1+ billion in the year, now representing one-third of the group's total AUM, up from 27% a year ago.
Assets in the Equities theme were stable at just over $6 billion, as positive market performance and outperformance from the investment processes implemented offset a small net outflow. Finally, the network of local asset management businesses performed well, demonstrating their resilience and delivering diversification benefits to the group, with assets maintained at approximately $7 billion. Before we look at the P&L, let me describe in a bit more detail the group's network of local businesses. As you know, over the past decade or so, we've established and grown a number of independent businesses in key emerging markets, from Colombia in the west to Indonesia in the east. Collectively, they now manage 13% of the group's assets on behalf of a range of domestic and international institutional clients, together with intermediary retail assets in some cases, and now generate approximately 15% of the group's EBITDA.
The dynamics and maturity of each local market is different, and hence each business has its own set of strategic objectives. But the common theme is to participate in the growth potential of the domestic investment management industry, while also providing the opportunity for international investors to access differentiated returns managed locally. The platforms therefore provide the group with diversification benefits and ultimately create value for Ashmore shareholders. As you can see on the left-hand side, each business currently manages between approximately $1.5 billion and just over $2 billion. So starting with Ashmore Colombia, this business has delivered a number of successful private equity exits during the year and is currently actively marketing new funds that are planned to close in the current financial year.
The business is developing a strong listed Equities track record, and is focused on growing this asset class over time through new fund launches. In the Middle East, there's an exciting set of opportunities in Saudi Arabia as the government pushes ahead with reform and its plans to diversify the economy away from its historical reliance on oil. Ashmore's business is playing an active role in this growth, starting, of course, with the delivery of outperformance for clients, but also targeting a broader product range and greater penetration of its client base. Ashmore India manages investments predominantly in domestic Equities, and given the strong performance and the team's track record, new equity funds are being launched to broaden out the local client base.
And finally, Ashmore Indonesia continues to develop well, and it is also delivering outperformance across both, across both listed Equities and listed fixed income strategies for a range of international and domestic institutional clients, as well as retail investors, accessed primarily through local banks. As you may recall, we listed this business on the Jakarta Stock Exchange nearly four years ago now, and with a market cap of around $150 million and a PE rating of over 20 x, illustrates the value creation opportunity within this third phase of our strategy. So turning now to the P&L and starting with revenues, the 24% decline year-on-year was heavily influenced by the fact that opening AUM of $64 billion were 23% below the average AUM level for 2022.
With assets falling by 13% over the 12-month period, the average level was 30% lower year-on-year in the 12 months. This means that net management fees reduced by 25%, reflecting the lower average AUM, but also a 1 basis point decline in the average revenue margin, partially offset by the benefit of a weaker sterling dollar rate compared with the prior year. Looking at the margin, the 1 basis point year-on-year move to 38 basis points reflects a number of consistent factors. Investment theme mix, including the stability in higher margin Equities and Alternatives, and outflows from lower margin large mandates increased the revenue margin. Conversely, there was downward pressure, given the stronger performance over the 12 months in lower margin strategies and large accounts.
The exit rate for the revenue margin was somewhere between 37 and 38 basis points, and I continue to expect the competitive industry environment will have an approximate 1 basis point impact every 12-18 months. But as we've seen again this period, mix, flow, and performance will continue to drive the margin from period to period. Performance fees of GBP 5.1 million were delivered in the year from a range of funds in Local Currency Blended Debt and the Alternatives themes. Based on current market levels, and recognizing it's very early in the financial year, with no fees earned by funds with an August year-end, I would expect a similar mid-single digit performance fee level to be generated again this year. Finally, on the revenue line, FX activities delivered revenues of GBP 4.4 million, slightly lower than in the prior year.
On operating costs, Mark described earlier Ashmore's consistent business model, and in this period, again, you'll see the reduction in costs, down by 4% as reported, and 7% on a constant currency basis, illustrating our relentless focus on cost management, particularly given the revenue environment. Starting with non-VC operating costs, the total of GBP 54.7 million is consistent with the guidance I gave in February. There was a year-on-year increase of approximately 13% in fixed staff costs, half of which was due to the lower average sterling dollar rate, and the remainder reflecting higher headcount, particularly in the local offices, and wage inflation in certain locations. These factors were more pronounced in the first half of the year, with H2 being flat half on half. There was a similar increase in non-staff costs, and again, around half of the rise was attributable to FX.
The balance of the increase is primarily due to higher business activity levels, such as normalized travel levels for the full year period. Variable compensation, as mentioned, has been accrued at 25% of pre-bonus profit, higher than the 21.5% last year to reflect the stage in the current cycle, where market and investment performance is visibly leading the financial results. In absolute terms, as Mark flagged, the bonus pool is 24% lower year-on-year, consistent with a decline in adjusted revenues, and therefore illustrating that the remuneration philosophy delivers a strong alignment between clients, employees, and shareholders. Therefore, notwithstanding the revenue headwind this year, the continued focus on operating cost management has delivered an Adjusted EBITDA margin of 54%, again, high relative to the industry peer group.
Looking at the seed capital program, the market value of investments increased to GBP 291.5 million at the year-end. Including commitments, the total program is approximately GBP 300 million. This means a reasonable proportion of the group's balance sheet is committed to support future AUM growth by helping to establish funds or enhancing the marketability of existing strategies. While realizations of investments produced a realized gain of GBP 2.4 million in this period, the weaker market environment earlier in the year resulted in an overall mark-to-market loss of GBP 8.3 million, primarily driven by lower valuations in the Alternatives theme. The second half environment was markedly better, particularly in liquid markets, and delivered a GBP 8.2 million mark-to-market profit in the second half. New investments of GBP 63.9 million were focused in two areas.
First, launching and adding scale to globally managed strategies in External Debt, Local Currency and Equities, and secondly, establishing new funds in local offices, including Saudi. Some of the Alternatives funds realized assets in the period, and there were client flows into local equity funds, which enabled the group to recycle at a profit GBP 24.6 million worth of seed investments from those funds. As a reminder of the overall benefits of the program, it supports funds that today manage approximately $6 billion or 11% of the group's total AUM. And finally, on the P&L, while operating profit fell, there were lower losses on seed investments this year, and the group's cash balances earned significantly higher levels of interest. So profit before tax of GBP 111.8 million was 6% lower than the prior year.
The effective tax rate of 22.6% was similar to the prior year, but higher than both the U.K. statutory rate and the rate implied by the geographic mix of profits at the start of the period. This reflects the tax treatment of seed capital gains and losses, the valuation of the deferred tax asset relating to share-based remuneration, and the impact of a change in the geographic mix of profits, with a higher proportion now being generated in higher tax jurisdictions. The first two items typically create some volatility, volatility in the tax rate from year to year, and the geographic mix provides you with a better guide to the forward-looking underlying tax rate for the group. Therefore, based on the current mix of geographic profit, the group's effective tax rate lies in the range of 19%-20%.
As I mentioned earlier, the board understands well the importance of the dividend, both to employees and our institutional and retail shareholder base. Therefore, taking into account the profits for the year, the encouraging momentum in our markets and the group's solid financial position, the group has recommended an unchanged final dividend to give 16.9 pence in total for the full year. Ashmore's business model consistently converts operating profits to cash and allows the group to fund investments in future growth, as well as delivering returns to shareholders. As I've just described, the net seed capital investments of GBP 51 million, the group additionally paid GBP 121.7 million of dividends, and the EBT purchased GBP 15.6 million worth of ordinary shares to satisfy awards to shareholders, and thereby avoid dilution for shareholders.
As interest rates move towards more normalized levels, the group's cash has delivered meaningful interest, and this cash is typically placed on term deposits with banks or in Ashmore money market fund. I therefore expect that this source of income will remain at similar levels, assuming the prevailing interest rate environment. And finally, from me, before I hand you back to Mark, an update on the balance sheet. Our consistent approach is to maintain a well-capitalized, liquid balance sheet with no debt to support our commercial activities, enable the pursuit of strategic objectives, and underpin returns to shareholders over the whole market cycle. This position has been maintained again this year. The group's total financial resources are more than GBP 700 million, while the capital requirement, using an IFPR approach, is GBP 81 million, providing in excess of well over GBP 600 million.
The majority of the balance sheet assets are in cash, totaling almost GBP 470 million, and the remainder being largely seed capital investments, most of which are in funds with regular dealing windows. Finally, a reminder on the impact and management of FX, principally, the sterling-dollar mismatch in the business. Ashmore earns the majority of its revenues in U.S. dollars and translate these in the P&L at the average cable rate. Conversely, most of our expenses are in sterling. Therefore, over time, we're natural sellers of dollars for sterling in order to fund operating costs, pay tax, and distribute our earnings to shareholders via the ordinary dividend. Therefore, in periods when sterling is weak, for example, earlier in this financial year, when the dollar almost achieved parity with the pound, it's beneficial to sell dollars to secure sterling at those levels.
Consequently, over the past 12 months, the currency mix of cash has shifted from approximately 50% sterling, 45% dollars to 80% sterling and only 13% dollars at the balance sheet date. With that, I'll pass you back to Mark.
Okay, so as traditionally, we just talk a bit about outlook. So we've covered some of this already. We're at the point where EM are doing relatively pretty well. The world's kind of going, "Ooh, what do I do next?" That sort of nervousness about geopolitical risk definitely reduced, as all of you will know, right? Risk, reduced risk appetite for people in developed markets in particular, and they went, "Ugh, what do I do? Oh, I'm frightened of risk. Oh, I better go to cash." Pretty much. So I think cash balances and near cash, in terms of money market products, are at very, very high levels. That won't last.
The dollar has entered, it looks like, one of its cycles where it weakens, which happens every 5 or 10 years, depending on how you look at it. It's very hard to actually choose the cycle, but it having been strong for a long period of time, now it's not a one-way bet, particularly given the way things look in terms of debt finance and what else has to happen, vis-à-vis the U.S. market. So the peak was probably late 2022. If U.S. fundamentals aren't significantly better than they are at the moment, and if the debt structure doesn't improve, you would expect to see that still to be a little vulnerable, particularly relative to what happens in the EM markets and EMFX.
So I think we're going to see asset price recovery based off two or three things. We've already seen some last year. I think a couple of things we're going to see. One is, I think there's going to be that attractant, that relatively currency attractiveness and very high real rates as rates are lowered in emerging markets. So I think that very high real rate return will be attractive to investors. Yes, diversification, of course, and if anything, they've reconcentrated a bit. DM investors have probably reconcentrated to DM, if anything, into all the DM markets, not just the U.S., but also Europe. So I think we're going to see opportunities both in the Local Currency space, also in Investment Grade.
You know, there's a pickup from doing investment grade in what we do, and it's pretty non-volatile and a very nice pickup, and it significantly adds diversification to an overall investment grade portfolio. And the data supports it, and our performance supports it, which has been consistently good through all cycles. In the Equities space, there's a lot of what we're doing that's pretty cheap. I mean, obviously, there's a very big trade around what happens in China, and the whole world is trying to work out what's happening there. But China, on most bases, looks very, very cheap. You've got to decide your moment to buy it and what you buy, of course, and that's the skill we think we have in spades in our equity business.
But there's opportunity that's going to be driven around that and what the ripple through will do to the rest of the Asian equity markets. So in terms of economic management, I mentioned at the beginning, emerging market governments, the larger ones, these guys have done a pretty good job in terms of allowing their technical professionals to manage the economy. There has been some exceptions, like, for example, Turkey, although at the moment, they're swinging back their way towards the way of the market. We'll see. The jury is out on that, frankly. But generally, they've done a pretty good job of it. The governments have come and gone, but economic management has been relatively good, and they've got ahead of the game in terms of trying to get on top of inflation quickly.
So we see big opportunity for us, actually, Local Currency bonds, and we see clients looking at that, which they probably... Clients were probably not looking much at Local Currency bonds for five years. I mean, there are some people who are allocated there and liked it, but in terms of adding, there weren't a lot of people doing that. We're now getting that. So small adds are happening already, and I think we're at the point where we've got some larger people starting to say, "Yeah, we should have some of this stuff." Investment grade, it's an education to say, "Listen, investment grade here is like investment grade somewhere else." If you're trading on rating, and if you look at the numbers, this actually gives you a nice diversification and a yield pickup against DM investment grade.
That message is getting through, particularly in Asia, where there's quite a strong bias to Investment Grade. There's some distressed stories in the fixed income space, which I think look very interesting in terms of where they are in the cycle. So there's opportunities to have significant bounce out of what's happening in some of the sovereign distress stories and in some of the corporate distress stories in, say, China real estate. These are at bottoms, and then it looks like some progress is now being made in terms of restructuring, but also government support. And then EM equity, I mentioned that before, but basically, GDP growth premium tends to correlate with equity performance and outperformance.
If you look at valuations in the box on the right, if you look at where we are in terms of absolute valuations at the end of June 2023, the yield on sovereign fixed income dollars, 8.4, the spread, 450. These are relatively wide levels. In terms of the Local Currency market, 6, 6.3. Treasury is at 3.8. Definitely some, some nice pickup over the Treasury space. And then on the MSCI, MSCI EM is on 11x multiple now. Multiples have contracted quite a lot. World was at 17, so there's plenty of room for, for us to, to, to get some of the money that's sitting in the world markets. So I think we've covered this really. Good performance over the last 12 months, great.
We're delivering outperformance as we'd expect, in increasing parts, and we're now well over the majority of our product. We've done what we do in the down cycle. It's all leading through as it would now, so that's great. That investment outperformance is the thing you want. That leads to the financials. There is a lag because you have to raise assets are based on the outperformance, so there's a lag to that. I've talked about that and how we plan to handle that in terms of our business. We're staying at doing what we do. You know, we stick with our mission. We have a consistent strategy and approach, and we're going to continue to do that to be the structured platform that can capitalize on the overall emerging market opportunity. And I think that's it. I'm open to questions.
Have you pressed the button?
David McCann from Deutsche Numis.
Great.
Technical issue aside, so you mentioned earlier, Mark, that the variable comp ratio could go up to 35% from yeah, the range you mentioned earlier. I mean, that potentially is a huge movement upwards. I mean, so what is the justification to, you know, third-party shareholders from, you know, something that could take 10-15 percentage points out of the operating margin? That's question one. And, like, you know, related to that, you mentioned that seed capital and interest returns could be included in that calculation going forward. Could you just confirm that, the mechanics of that? Because previously, it's been based on operating margin. And, yeah, the other question is, Tom, you mentioned that GBP 60 million of interest income would also be your guidance for the current year.
I mean, given that spot interest rates are higher than the average of last year, what justifies a flat interest income for looking forward? Thank you.
So starting with the first one, as I said, we want to be a high-margin asset manager. We've been a very high-margin one relative to everyone else. Conversations with shareholders have included lots of conversations about how we do things and don't do things, and there's things that they'd love and things that they don't love. But generally, those sort of conversations tend to try and push you towards becoming a low-margin asset manager, which we don't want to do. So we plan to stay high margin, but the way we think about the business is, if investment performance is strong and assets are lagging, you have a choice, right?
You either don't pay the people who are generating the investment performance and supporting the people to the people that support doing that, or you say, "We feel we should be paying people, and that is a sensible thing to be doing." There is no guarantee that we will pay 5% or 35%. The way I'm thinking about it is, if I've indicated a maximum of 25 over Christ knows how many years, and we've done it once, it might make sense to say, "Well, we might need a bit more room," but it really depends a lot on flow. It depends on what happens in terms of some of the other returns and some of the other things we do. So I just-...
Giving a little bit of an indication that it could be a higher number, and I would see the range going forward as up to 35%. That's that. What was the second question?
[audio distortion] .
Yeah, exactly. Again, that's, that's the returns on that, and what we do with that, traditionally been based on, well, have been based on what we do in terms of our investment skill and picking the right things to scale the platform. The returns we make off that comes back to, comes back to the business. And so in terms of keeping the right balance between shareholders and employees, and of course, all shareholders, all employees are shareholders, but obviously they're also employees. And in the current environment, we think it's important that that has the option of being part of the pool. What was the next one?
There was a question on finance income. So GBP 60 million for this year. I think I said a similar level, so somewhere in the GBP 15 million-GBP 20 million range is a sensible guess for this year. So we delivered somewhere just over 3%, below 3.5% on average over the full year period on cash. We're achieving a little bit ahead of that, but I wouldn't get crazy excited about it doubling, I guess, is what I'm trying to temper you to.
Yeah, and obviously, by maintaining the dividend, we're taking cash out of that pool anyway, right? So... Yes, please.
Testing. Yeah, it works. Okay, thanks. It's, Hubert Lam from Bank of America. Just three questions. Firstly, just go back to that variable comp accrual point of up to 35%. If, Mark, everything you're saying is, is, is going to happen in terms of we're at the bottom of the cycle, flows are likely, hopefully coming back, performance is getting better, and financial performance catches up, what's the likelihood of actually getting up to that 35% if you're, if you're-- what you're implying is that we're past the worst? Shouldn't we think about the variable comp actually coming down from that 25? Like, just, I'm just wondering what scenario could, could we see again, that variable comp be above or towards that 35%, which you mentioned?
I think you probably know, we try and run the thing pretty conservatively, and what we don't want to do is create a surprise at any point in time. So the answer is, we don't know. And so as we go through the year and we see how the performance is, I mean, we see an opportunity to probably add significant assets over the medium and medium term. In terms of Equities, there's a $10 billion opportunity there. In terms of fixed, there's easy another $10 billion, and there's probably $10 billion in some of the things we do in local markets. There's plenty of growth opportunity. If that comes quicker, we may not be anywhere near that. We may be down, exactly as you say.
I think the best way to look at this, and the way we look at it, frankly, is what we accrue at the half year will give us a pretty clear idea of what's likely to be where the direction of the full year. It's just too early in the year to say, Hubert, to be honest.
Okay, but just wondering again, sort of about that point, is that just like a, a backstop, or should we expect variable comp to be higher going forward, even in more normalized?
It's going to depend upon the scale of the business and performance and P&L. I'm just being conservative. I like to—I like to... I don't want to ever give anybody a big surprise. So the way I think about it is it's up to 35. It could be considerably below that. It could be below 25. It could be below... I don't think it'd be below, below 14 again, but you never know. And arguably, it's never been below 14, per my discussion with Paul.
Okay, thanks. Second question for Tom. In terms of fixed costs, just any guidance you have for this year?
Yes, so you can think about the second non-VC costs. Second half run rate is indicative of where we're running now, with maybe a little bit of growth for the full year, but small, couple of percent.
Thanks. And lastly, Mark, you mentioned in terms of, I guess you see opportunity in Chinese real estate. Just wondering what your exposure today is on Chinese real estate, where... And it seems like you think it's an interesting opportunity now that we've reached the bottom. Just wondering what your positioning is around that?
Yeah, I mean, we have some. It's not significant in terms of our total assets, though, and it's in specific product, so it only touches the product that can take that sort of distressed, high yield, upside opportunity. The equity story is slightly different because you've got to get through the restructuring of those assets, and that's gonna... They're gonna end up a bunch of equity in the hands of bondholders. So the equity story is a different story, and I think it's probably a bit later in that space. So our opportunity within China and Equities, we see in a different place. Well, at some point we'll see it there, but we don't see it there right now. So we're looking at other things in China that interest us in the equity space. Yes, please. Yeah, you've got to use the wand or you're in trouble.
Testing. Okay, perfect. Hi, it's Greg Simpson from BNP Paribas. Three questions. The first would be, on the improving investment performance, is there a way to think about whether that translates into improving subscriptions or improving redemptions? And the lag you mentioned, those two dynamics.
It always leads to improving inflows. It just... What you can sometimes get is a little bump around the bounce where people say, "Oh, I've phew, I've made some money there, and maybe I should now hold cash." I think we've seen some of that over the last six months. I feel now we're really through a lot of that. Yeah, I've, I think maybe there'll be a bit more to the rest of this year, but we're sort of at the bottom and beginning to move in the right direction. The fact that we're getting new finals pitches, where it's been pretty quiet over the last six to 12 months, the fact new finals pitches are coming, so people are now starting to think about: Well, hang on, I did my, Oh, God, and thank God for rates trade. Now what do I do?
Oh, God, the war is still going on. No idea the Chinese are doing whatever they're doing. Where are we at in all of that? Now, if the Chinese really are beginning to do something else. So I think over the next month to three to six, whatever, you're going to see people thinking and reevaluating, and you'll start to see that all pick up. So as long as our investment performance is good, and it continues to be, the majority of our products outperform, then we'll start to see our share of that flow, and the flow will go up. You know, that will come. So it needs the beta to not be melting down. We've gone through that. That was all the beta. It needs your relative alpha to be good, as is.
And if the beta is up and our alpha is good, then we'll start to see a share of flow. So that's the way I see it. I think we're at the point where we're. You can never be completely accurate, but most of the outflows should have been through, and we should now be moving into an inflow, but it could take the rest of the year, and we'll see. I don't know. I can't. But we are getting a better kind of client engagement. It's not, "Oh, dear, what do I do?" It's, "Okay, so now where do I make my returns from here?" And that just starting to do that.
But maybe linked to that, in terms of the interest that's picking up the finals, is there a kind of theme in terms of geography? Is it kind of non-
There is a bit of a theme.
Is it the EM investors or the EM investors?
Well, yeah, there is a bit of a theme. I mean, I'm glad you asked that because I forgot to say it earlier. In terms of our share of investors, the EM share keeps going up, so it's now a third of our money. 33% is coming from EM investors. Now, partly that's because DM have flown to cash or to the U.S., some of them, but it's steadily increasing in EM as a percentage and also in terms of actual numbers they give us. And EM tend, to be honest, tends to be much stickier, as well, particularly institutional capital. Retail, less. But retail is retail everywhere. But institutionally, there tends to be more. They've kind of made a diversification decision.
They, you know, they had their U.S., their euro, whatever they had in China sometimes, and they've made a sort of diversification decision to have some EM, particularly the institutions we're talking to. They tend to be a bit stickier. So what I would say at the moment is that's at a third. I'd expect that percentage to continue to increase. You may have... Where we're seeing sort of final conversations at the moment, it's a bit of a split for DM and EM. Asia and Europe is where we're seeing most interest in starting to diversify, A, out of the dollar into local currency, and B, into our investment grade, not just pure investment grade. U.S. is still a bit, where are we going from here? You know, America is America. There's still a little bit of that.
Retail is beginning to move a little bit into equity in America. So retail will probably be a more early reactor, probably because they're being dragged up a little bit. They're seeing a better story. They're seeing that we can offer them small cap mid, if they want, frontier, if they want, all cap, active, whatever they want. But also because they've had such a, they had such a run in U.S. equity, and then it's like, whoa, some of that's really not hasn't run. That's not done so well. So they might have an AI bet, but they might say, "Well, what else should I be doing if I like Equities?" And retail, I think we're seeing a little bit of movement there with EM. But the U.S., yeah, IG conversations are starting.
IG conversation is definitely starting, but there's definitely been a shift in the U.S. into, "I'm going to sit in cash and money markets for the minute." Once rates stop going up in the States, that will change. Happens every time. It just, it can take six months, it can take 12 months, but that, once rates stop going up, and if they start being cut, that will all change.
And then lastly, are there any kind of key overweights or underweights in terms of positioning you'd have, also in the context of China? If China outperforms, would that be relative good for you or bad? Thank you.
Well, we're pretty active in what we do, so if we get the timing right, yes, it would be good for us. We tend to be picking stocks and stories rather than just having fundamental country beta overweights. So I think our stock picking is pretty good. So I think, yes, that will be pretty good for us. Yes, please. Intelligence test.
Hold it. Oh, hello. Now it works. Perfect.
Great.
Bruce Hamilton, Morgan Stanley. Thank you. So I don't want to labor the point on variable comp, but I'm going to try one more. If I look at the absolute, can we think of it in absolute terms, perhaps? So GBP 35 million, I think, is where you were back in 2016. So should we think about... Obviously, we don't know how quickly the revenues recover. So are you kind of saying that it's going to be quite hard for you to shrink that much more in absolute terms, given the need for talent retention, and that's kind of one way that we might think about it? Or is that sort of not going to work?
No, I understand. I mean, because believe me, sometimes we think about it that way. So it's a logical way to think about it. But we've kind of disciplined in our, "It's a percentage" mentality. So, and we just want to create a wider range to give ourselves a chance if we feel that we need to. If we have amazingly strong outperformance in every asset class and zero inflow, we would want to reward the people who did that if they did a fantastic job, if we did an amazing job controlling our cost base, if the support did a fantastic job, if the sales guys were doing a pretty good job, but not a fantastic one, if there weren't much inflows.
We want to be sure on a balanced basis, we could look after people across the firm that should be looked after. So we want to maintain our structure, be ready to reabsorb assets and to grow again. So the percent we have obviously figured back to some extent, the percentage is driven by something, and it's, but it's also driven by prediction going forward. We're not going to use it unless we feel we should. We just want to create a wider range, indicate a wider range, just people can say, "Okay, we understand there's a wider range." So I haven't... There isn't a hard and fast, "It's X," but of course, we do think a bit about X. It's a- you are, Bruce, it's natural.
Got it. Okay, that's helpful. Thank you. And then second one, just on the local offices and the local sort of firms, I guess if you think about the next most attractive areas, or, you know, are there obvious geographies that would look appealing, or do they have to be very opportunistic because it just depends on whether there's a good local firm that, you know, wants some support? How should we think about that?
That's a really good question, because so the way we look at it is there are a series of geographies that are appealing, and they have to tick a series of boxes: demography, regulation, this is linked a bit to regulation, but local bias in terms of whether you can actually play in the space, if the laws are set up properly, if there's not massive local bias, that means that you're the mug foreigner, you should probably avoid it. And infrastructure, legally, infrastructure, technology, and all that kind of stuff. So those are the starting thing, and that gives you a group of markets. Then it's about finding the right people. And it can either be, yes, there is a business acquisition opportunity.
Never say never, but I generally believe you build better asset management businesses in terms of groups of people who share, that they share the equity in their local business, and they, they kind of share the dream, and they say, "Hey, I can... I could grow something. We could take it. This could be great." So we're biased to people rather than, "We've got to have that business," but you never know, and there are things that get shown to us that sometimes make sense, and we've done one or two in the past. It's the bigger economies. You should think about the bigger economies and the, if you like, the more diverse economies. The economies where the authorities have got the joke, which is, if you want broad capital markets, you need dedicated asset managers.
Most emerging market economies, like ours did in the old days, everything's combined in a broker. The asset manager is part of a broker, which, as we all know, is not a long-term strategy. Well, I mean, it's fine, but there is a pretty heavy conflict in that at some point, and when things get difficult, boom, every time. And most emerging markets, not most, but a lot of them still do that. So getting them to think about them separately, and you kind of need the regulator to do that, and they all get there in the end, but it takes a while. But we get, I say, where we are now, we've got there. There are other economies where we would naturally look to do things. They would tend to be the larger ones. So I'm going to pick a few.
The larger Asians, you could see some interest in the Asians, and that could be anywhere from Malaysia to Vietnam to Thailand, there's an opportunity. It's not one of the largest economies, but there is definitely an asset management opportunity there. Then you could come across there... Europe, a little difficult. Europe, it got sort of run over a bit by the banks that overpaid and then crushed the margins of the platforms. I don't know in terms of Eastern Europe and stuff. Africa, again, I'm not sure I can get scale, but never say never. And then in Latam, for sure, there's a... Mexico would be an obvious one. You find the right partner. And one or two other places.
Brazil, we've done before, but not found the right people in the right place, and never really got that to a point where people were thinking about growing with the domestic industry. Brazil would definitely be a candidate at some point again. Argentina, less likely. There might be a small opportunity there, but Argentina is very cyclical. Very. So, scale, people, okay, regulation. Not getting rogered by, you know, the laws and things, which happens, but you try and minimize it. Anybody else? Yes, please. Ah, you got your own mic. That always helps.
[audio distortion] from Rowan Dartington. Can you give a little bit of commentary on your performance against peers, and, how important do you see this is in general and both, and, when it comes to these small pitches?
Well, I think it's important, for sure. I think people judge you against... Yes, I mean, they judge you, first of all, I would say, in terms of the way people look at you institutionally, forget about retail for a minute, but institutional-most retail is controlled by institutions, so the way they look at you is, what's your performance? They probably start with how is your performance? If you have an index product, how do you perform against index? And then once they've gone through that as a filter, then they start looking against your performance against peers, and then they'll talk to you and put you on shortlists, or normally longlists before shortlists, based on that. So it's definitely important. And the answer is it varies by strategy.
So we're always trying to be second quartile or upper quartile or top quartile. We're there in everything, probably, except maybe corporate high yield at the minute. Maybe not in all of Blended, but Blended investment grade we are. So Equities we are across the piece. All the local businesses are. So we're kind of where we want to be. I can't say that's definitive fact, but that's my gut feel of where we are. Anybody else? Brilliant. Well, thank you for coming. Thanks for having us, UBS, always kind. Thanks for arriving and sharing us from the back. How are you doing back there? And thank you very much for owning the shares, and we hope you continue to do so and continue the journey with us. Thanks very much, everybody. Thank you.