Welcome all to the presentation of Brooks Macdonald's interim full-year 2022 results. With me today is Ben Thorpe, our Chief Financial Officer, and he'll be talking to you in a moment. First of all, though, I should say that while this is a presentation of our half-yearly results, our foremost thoughts are very much with the people of Ukraine during the terrifying and tragic invasion which they've been subjected to. They and all those who are impacted, both in Ukraine and their friends and family outside of the country, have our full support, and we are doing what is right to help where we can. Moving on to the results, I'm pleased to be able to report another strong six months for Brooks Macdonald as we continue to build on our solid foundations.
We've been gaining momentum in flows, the positive nature of which, together with the acquisitions which we have made, have driven revenues higher. Allied to ongoing strong cost discipline, this allows us to report record underlying profits and, importantly, underlying profit margin, giving us the ability to invest sensibly to meet our exciting growth ambitions. In terms of our value drivers, which I will come back to later in terms of how they will propel us forward, the first six months of the year have seen good progress on all fronts, with improving flows across a wide range of products and services, as well as in the U.K. and internationally.
The rollout of our digital onboarding solution, making intermediaries' lives easier, and while no acquisitions have been undertaken, with the integration of Cornelian and Lloyds successfully completed, we're well positioned to take advantage of opportunities as they arise. Our success has been built on the hard work, great attitude, and ambition shown by our people across the whole business. We have an awesome team who are excited to be part of our growth ambitions, in which we have a real belief in our ability to deliver, both organically and inorganically. While the macro situation creates uncertainty, we can have confidence, having built an increasingly strong financial position. With which, I'll hand over to Ben on the numbers.
Thanks, Andrew. Good morning, everyone. We are very pleased with the results and our achievements in H1. Importantly, we have again delivered what we said, strong results across the whole group and positive net flows. It does now look like H2 will be tougher than we expected. However, we are well-placed on new business, and we are well-practiced at cost discipline. Turning to my first slide five. Income was up by 10.7% to GBP 61.9 million. Underlying profit was up by 25.7% to GBP 17.6 million. Our underlying profit margin is up to 28.4%. Statutory profit was down slightly by 6.4%. If we exclude the one-off gain from the acquisition of the Lloyds Channel Islands business last year, we're actually up by 45%. Basic EPS is up by 20.7%.
Finally, our interim dividend is up by 13% to GBP 0.26. Turning to slide six. Total FUM increased by 5.3% in the half to GBP 17.3 billion, with investment performance delivering 3.3% and net flows delivering 2%. Therefore, we are firmly back into positive territory on flows with an annualized growth rate of 4%, which is spot on guidance. Turning to slide seven. The graph on the left shows we have now had 3 consecutive quarters of positive net flows, with the last quarter being 55% higher than the one before. The progression of net flows won't be linear, and we will have quieter quarters every now and then. This is in part due to seasonality, which you can see in our Q1 figures from this year.
That is traditionally a quieter quarter as it contains the later summer months. Also, we now have the impact of our new investment solutions business, BMIS. This is lumpy in nature and therefore will also drive some quarter-on-quarter variability. The table on the right shows the detail by product and business. BPS is growing again with a broad recovery across our branch network, and we have continued strength in our specialist offerings. MPS continued to be strong across the piece, with firm and BMIS up 50% in H1. The funds business continued to see net outflows, although they are much improved. The Defensive Capital Fund has now stabilized and is performing well. However, we did still have net outflows across the full fund range, and therefore this remains an area of management focus for the year ahead.
Finally, it was great to see international contributing positive flows in Q2, and this trend will continue into H2. Turning to slide eight. This slide contains some new information looking at gross flows. You can see that good progress has been made with gross inflows now up 15% on an annualized basis. This clearly shows our energized and focused distribution efforts are working. Attrition is also continuing to moderate as we said it would, with further reductions expected. Therefore, encouragingly, the trend of improving net flows is now underpinned by improvements on both sides of the equation. Turning to slide nine.
Margin progression and the embedding of operational gearing have been one of our key achievements over the last three years, and this half's record margin of 28.4% is a testament to a lot of hard work across the group. Revenue grew by 10.7% despite weaker transaction income, and cost growth was contained to 5.7%. Therefore, the jaws ratio, which is defined as the difference between the percentage increase in revenue and the percentage increase in cost, continues to be positive at 5%. Given current market volatility and the seasonality of our costs, especially the FSCS levy, which all comes through in H2, I would expect the H2 margin to be lower than H1, but by how much is very difficult to say at this point. Turning to slide 10 on yield.
Total group yield is down by 5.5 basis points from FY 2021, driven by non-fee income, with the decline now due to lower transactional income rather than lower interest income as we saw last year. This is because we had a stable asset allocation in H1 and activity levels were low. However, we do expect this to pick up again in H2, given current market volatility. This is a good example of where doing the right thing for clients can impact short-term business performance. Longer term, we see a fee-only rate card is the best way forward, and in the first half of the year, over 90% of our flows into BPS were fee only. We have also seen a moderate impact from the change in mix as business growth is weighted towards platform MPS and our new B2B offering, BMIS.
Turning to slide 11. We have continued to be focused on costs, and our disciplined approach allows us to invest while supporting continued margin progression. All the year-on-year increase in cost is due to the inclusion of Lloyds for a full 6 months rather than just the 1 month we had last year. Finally, there has been a small impact in the shape of the group costs, compared to last year, given the transfer of headcount to SS&C. It is pretty much a straight swap between staff costs and non-staff costs of just over GBP 1 million. Turning to my penultimate slide 12. Our capital position is strong, and it's improving. Surplus capital is up almost 70% from the full year. This gives us lots of options, whether it be funding of small acquisitions or growing future dividends.
My final slide 13 on guidance. Clearly these are tricky times in which to give guidance, and we are in a different position today than we were a few weeks ago. While our pipeline is strong, we would now expect current events to have an impact on conversion times, with bps being most impacted in the short term. However, we do remain confident on net flows and expect both quarters this half to be positive at the group level. I should also call out again that we expect international to be positive for the second half. As I mentioned earlier, we should expect a recovery in yield in H2 as portfolio activity levels pick up off the back of the market volatility.
On costs, expect H2 to be the same as H1, plus an additional GBP 2.5 million for the FSCS levy. CapEx and dilution management guidance are the same as before. Finally, please note the more detailed guidance on the various share counts to aid in the modeling of EPS. In conclusion, we have again delivered a strong set of results, and we are a business that, despite the macro headwinds, is well placed for future success. I now hand you back to Andrew.
Thanks, Ben. Turning to slide 15, as you've heard, our strategy is paying dividends in terms of net flows and financial strength. We need to keep driving forward and focusing on our ability to be the best that we can be. With this in mind, we have initiatives being undertaken in each of our value drivers to build on our momentum. From an organic growth perspective, the fastest-growing segment of the market is managed portfolio services on platforms. Our focus is on ensuring that we are the provider of choice in this area. Our business-to-business proposition, Brooks Macdonald Investment Solutions, is a great entry point to this market and provides us the opportunity to offer investment support to firms at points of real change for them as they go through their life cycle. Our bespoke portfolio service remains hugely important to us.
By building strong relationships through the sale of our model portfolios, we're finding that the opportunity to cross-sell bespoke portfolios for those clients who need them is increasing, allowing us to deliver positive flows across all discretionary services. It is also key that we build a balanced business. I'm pleased to say that our private client division is now contributing significantly to gross flows as we build a quality solution for those clients who choose to come to us direct. Our relationship with SS&C is clearly key to our ability to deliver service and operational excellence. It is important that we aim to be the best we can be across the whole business, not just digitally.
In 2022 and beyond, we will have a real focus on both providing a superior experience to clients and intermediaries and delivering on our digital transformation whilst ensuring we're getting value for money where we invest it. Inorganically, we remain ambitious in what we can achieve by acquiring quality companies who bring to us real value and great cultures. One last point around our priorities for 2022 is the delivery of what we call our promise, which allows us to attract, engage, and retain the best people by offering fulfilling careers in an inclusive culture that values ambition and rewards performance. This is, after all, a people business in a people industry, and the quality of our colleagues sets us apart, so it is hugely important that we create an environment that attracts the best.
From slide 16, I want to look a little more in detail at our value drivers and at three of our priorities, in particular, the first of which, unsurprisingly, is organic growth. The attractiveness of our propositions to the markets we're targeting is, of course, key, and we've worked hard to ensure our offering of managed portfolio service on platforms is the best in class. In terms of flows, we turned the corner here towards the end of FY 2020. We've really built momentum in FY 2021, and with the launch of Brooks Macdonald Investment Solutions, reached a growth rate of 73% when we look at 2021 as a calendar year. Our ambition is to keep the rate of growth high in this sector, which we believe we are well placed to do through the stronger identification and execution of opportunities.
This will also allow us to build the relationships which are important in maximizing the distribution of the full range of products and services. That range now covers the full investment life cycle of a client, from accumulation to decumulation, from investing GBP 100 to investing GBP 1 billion, whether you're a vulnerable client or whether you're protecting for inheritance, all of which comes with ESG as part of the investment process, and all of which is designed to maximize the potential for a client to achieve their ideal outcome. We strongly believe that this is most likely to happen when guided by financial planning, and therefore we continue to focus on our ambition to be the leading investment manager for intermediaries. The second priority I want to touch on slide 17, is delivering digital transformation. To enable our growth, we must differentiate ourselves in the intermediary market.
To do so, where price and performance are hygiene factors, it is key that we are as easy to use as possible, working hand in hand with intermediaries and their businesses at all levels. Our digital transformation enables us, and this is progressing with our SS&C-driven solution, benefiting from their purchase of Hubwise, whose integration into our delivery adds a bit of time, but it adds much more in terms of the development of our capability going forward. Delivery of the full remaining migration to their systems and our new client portal will occur when we're all comfortable that it is ready, delivering on the benefits we set out to achieve. The rollout of our new digital onboarding solution is being well-received and gaining the hoped-for plaudits.
It has significantly streamlined the process of bringing clients into our world and has given us a real insight into the possibilities as we continue to transform digitally over the coming years, enabling us to become a truly easy-to-use provider. Finally, in terms of our priorities on slide 18, I just wanted to touch on M&A. We've maintained our criteria of only buying quality businesses who add strategic value, create economic benefit for us, and crucially, add to the culture of Brooks Macdonald. We remain actively engaged in the market, and whilst our criteria mean that there are not many businesses that are right for us, it does mean that those that are, will integrate well and will add value to what we do and to who we are.
Last but not least, on slide 19, I wanted to touch on the work we've been undertaking on our corporate social responsibility agenda, which together with our guiding principles that we care, we're connected, we do the right thing, and we make a difference, really does help to drive the culture of Brooks Macdonald. In diversity and inclusion, we have, with our partner Zircon, devised a recruitment process to remove as much unconscious bias as possible, which has resulted in a diverse group of 18 trainees joining our cohort in the last six months through three schemes. We've continued to upgrade the quality of our offices, moving into city centers for ease of use for colleagues, for clients, and for introducers. We've deliberately selected suppliers who align with us in terms of their CSR ambitions and who will enable us to achieve net zero as early as possible.
I could go on, as there is much ongoing, but as a final example, we're trying to make a difference through our partnership with the Dame Kelly Holmes Trust, supporting them in tackling youth inequality while also enjoying working together for a good cause while we celebrate our thirtieth anniversary. To conclude, we are proud of the results which we're presenting to you today, and we're excited by the opportunity which presents itself to us at this time. We have a high-quality, ambitious team in place to drive us forward, and we're focused on our value drivers and the priorities that we've identified for this year, which will enable us to hit our growth and financial targets. Thank you very much.
Your first question is from the line of Ben Bathurst from RBC. Please go ahead.
Good morning, all. Thanks for the presentation and for taking my questions. I'll start with one on M&A if I may. I note your comments around the commitment to inorganic growth and your criteria for acquisitions. Just in light of some of the recent news reports, would it be fair to say that you are now more actively considering larger deals than those that you've carried out in the past? Are larger deals that meet all of your criteria more difficult to find in your experience looking in that area? Then secondly, on the SS&C agreement, you've had dual running costs of GBP 1.6 million in H1. What should we expect in H2, if anything there? Just a little bit more detail on the SS&C costs.
How does the ongoing charge for the SS&C agreement work in a higher inflationary environment? My understanding is that the charge is linked to basis points of FUM. I wondered in a higher inflationary environment, if we can expect that cost, some cost pressure there, or is that line effectively fully insulated? Thank you.
Thanks, Ben. It's Andrew here.
Hi.
I suggest I'll take the first one on M&A, and then I'll pass over to Ben on the SS&C question. From an M&A perspective, I think there's a couple of points in there. Firstly around appetite for deal size and what the market looks like. We are as active as we have been in the marketplace. We've always been willing to look at what is available, what's coming to market, and importantly, going out into the market and having the relevant conversations with people where we think there's an opportunity. That is fairly agnostic of scale, albeit right down the bottom end, you know, the cost of doing an acquisition outweighs the benefit. We are
Mm-hmm.
We're open to accretive smaller deals where we see that there's real strategic value for us as a business. Equally, we're quite happy to look at the larger, more transformational deals. You asked the question, is it harder to find those large deals within the criteria? I would say yes, to a degree. Where you've got a smaller business, it's easier to pinpoint a culture. It's easier to pinpoint the individual points of strategic value.
But that doesn't mean that within those criteria, you can't find good synergistic deals where there are similar cultures. We know that they're out there. I'm not gonna say more than that, but I mean, I think it's an exciting marketplace. The economic benefit is probably the hardest point or has been the hardest point up until recently. Valuations now, I'd struggle to put a number on, if I'm honest. Ben, do you wanna cover the SS&C point?
Yeah. Good morning, everyone. Morning, Ben. Thanks for your question. In terms of guidance on dual running costs in H2, I would plan on a number very similar to what we had in H1, so somewhere between GBP 1.5 million and GBP 2 million. In terms of the contract with SS&C, it's a great contract. It's, you know, it's really gonna help us deliver operational gearing. It is inflation-proofed. It's on a bps charge, as you say. So, you know, that's gonna stand us in good stead in current market conditions. So, yep.
Great.
Hope that answers your questions, Ben.
That's very clear. Thank you.
Thanks.
As a reminder, if you would like to ask a question, please press star followed by one on your telephone. The next question is from the line of Paul Bryant from Equity Development. Please go ahead.
Thanks, Andrew, Ben. Two for me, if I could. First one to do with gross outflows. That's been quite a big drop in H1, and it certainly has been dropping recently. Could you comment on what you think the main drivers are behind that, and if there's anything specific you've been doing to address outflows? Then the second question has to do with BMIS. Obviously going very well there. I appreciate it's a kind of package deal for advisors, but again, could you go into a bit more detail on what's getting them over the line, what they really like about that proposition? What is so special about it? Thank you.
Many thanks, Paul.
Thanks, Paul. Shall I do the gross outflows point? So yeah, it is a significant improvement from H1 FY 2020, where we've effectively halved the gross outflows. Really it's performing exactly as we said it would, which is the impact of the restructuring and the focus on business quality would wane, and we would move back to more normal levels. We still think there's some more to go, and I certainly see us chipping off two or three percentage points off the gross outflows over the year ahead, if things stabilize. Really, you know, that's as expected. The other thing is we're a lot slicker at defending when people leave now, and we haven't had a lot.
any leavers for a while. If people do leave, we generally now retain a significant portion of the book. That really is the main drivers of the improvement in gross outflows. Thank you.
With regard to BMIS, so as we call it, Brooks Macdonald Investment Solutions. This is really about partnering with IFA firms. It's something that we've done very well for a long period of time, and this is really the latest iteration of it, very much allied to the MPS services that we offer on platform. We ran something called strategic alliances for a long period of time, which are all about understanding an IFA's business and adding value to them as they go through their life cycle, and BMIS is very much along those lines. Typically it will be a point in time for an advisor firm where they are going through a piece of change.
For a good example of that would be where they've managed advisory portfolios in the past, and they've decided that actually that's not the focus for the business. The focus is financial planning. They might not want the risk of running portfolios. We come in at that point in time, we talk to them about what it is that they're actually looking to achieve, where they want to go with their business, what their long-term strategy is, and then we'll work with them to align investment solution, which works for them utilizing you know our centralized investment proposition. We'll talk to them about okay how are we gonna market this? How are we gonna take it to their existing clients, to their new clients? What are the strategies that we should be building in around that?
How are we gonna take their advisors over the line, persuade them that this is the idea that they need to be taking out? It really is a case of knitting the two businesses together. As a result, we will be given charge of a significant portion of the assets. What you tend to find is that the discussion is around MPS on platform. From that come, okay, you're comfortable with the centralized investment proposition, therefore, what are you doing about clients in decumulation? What are you doing about your vulnerable clients? Inheritance tax through AIM and responsible investing and the like. The partnership grows and widens from that perspective.
It's a professional way of working with advisors to build both businesses. Hopefully that's helpful, Paul.
Super. Thank you, Andrew. It is. Thank you.
There are no more telephone questions at this time. I hand back to Alick Mackay.
Thanks, Nairobi. We have two questions on the web stream, one from Stuart Duncan at Peel Hunt and one from Ben Williams at Shore Capital. Stuart's first. Thanks for the additional detail on gross flows. Is it possible to break down the outflows into good versus bad flows, i.e. how much due to death, divorce, drawdown versus regretted client losses? Second, how quickly does interest rate pick up? Any sense you can give with relative to base rates? And third, with regards to the digital transformation, can you achieve the necessary developments within the existing CapEx expectations?
Do you want me to touch on the gross outflows? You had a go on gross outflows.
Yeah. Well, you can start and I can maybe add a bit more color.
Yeah. Okay. Fantastic. We're going through a process of getting the attrition rate down. We've been working on that for a while. You've seen in the presentation on Ben's slide, where the good news in terms of gross inflows but also the good news in terms of attrition. We're not finished yet on that journey. You know, we think that the natural rate of attrition is probably 6% in this industry. We've got a little way to go before we hit that sort of number.
The work that's being done individually with clients and the work that's been done with advisors over the last two years really in building the trust in Brooks Macdonald is really paying dividends now. You know that if we talk about jaws in regards to flows, you know, we've got two targets here in terms of gross inflows and attrition, and both are doing and both are working well.
Yeah. I mean, the only point I would add is we do track this, as you would imagine, in great detail and review attrition every two weeks, in fact, to see if we can identify any trends and nip them in the bud. As Shep says, we're working on about 6% is where we'd wanna get to. If we get there, clearly, you know, we would get to the 70%-80% next year without anything else changing. In terms of giving detail, we don't at the moment, but in broad brush, you know, sort of one-off outflows or regretted outflows related to the restructuring are probably still a couple of percentage points in that 10.6%.
We also saw some elevated cash withdrawals, you know, off the back of COVID, people taking out money to buy houses or manage inheritance, et cetera. Probably of about another 1%. If you take those, you know, that 3% out, we're already at 7.6, so not far off the 6. In terms of where we think we're gonna get to, you know, it's quite easy to believe that those that will happen over the next year or so. To your second question on interest, I mean, we would expect there to be, you know, somewhere between 4 and 6 base rate increases over the year ahead, depending on what level, and that should drop through pretty quickly into increased income.
You can go back a couple of years and see that, you know, at 0.75, we were making somewhere between GBP 4 million and GBP 5 million a year of interest income, and this year we're on track to make, you know, GBP 1 million a bit depending on where base rates end up. It could add a meaningful amount of money to next year's revenue if things play out as we expect. I think Ben Williams' question was probably the same actually.
Yeah. No. We've got a message through from Ben who's indicated that his question has been largely covered, so he's comfortable.
Yeah.
I'll pass back to Nairobi to see if there are any further questions on the call.
There are no more questions at this telephone queue.
Sorry.
I will hand over.
Sorry, Nairobi. Did we finish answering Stuart Duncan's question on digital transformation?
Go ahead. Remind me.
The question was, with regards to the digital transformation, can you achieve the necessary developments within the existing CapEx expectations?
Thank you for the reminder, Alick.
Yeah.
We let that one slip. I think the point is we haven't changed CapEx guidance, so that remains the same. We remain confident we can get everything done within that envelope.
Thanks, Ben. Nairobi, no more call, no more questions on the call.
No, we don't have no more telephone questions so far.
Okay. Brilliant. Thank you all for attending this morning. Obviously we're open to questions, as and when you have them. We look forward to speaking to you in the future. Thanks very much.
Thanks, everyone. Have a good day.