Earnings Call: H1 2017

Aug 1, 2017

morning, everybody. Thank you for coming. We'll rattle through the disclosures. There we go. So I'm going to start today with an overview of the 2017, focusing on how the funds have performed, how we've developed on the client side. Mark will then take you through the numbers as usual in detail and then I'll come back and discuss the progress we've made in each of our investment engines during the first half of the year and also some of the comments on the overall outlook and then we'll take questions at the end. Well, we're obviously very pleased to report a 19% increase in our funds under management to GBP95.9 billion and especially as there's growth across all of our investment engines. Strong client demand for our emerging market debt strategies, for our firm managed accounts and also for the quant strategies led to net inflows of CHF8.2 billion in the first half. Although we're pleased to see this vote of confidence from our clients, it's important to note that some of the largest inflows have been into the lowest margin product. Investment performance added CHF3.8 billion with positive momentum in markets driving investment gains in our long only strategies, particularly at Numeric. Absolute performance at our alternative strategies, although positive, was not as strong, but we delivered solid relative performance, particularly at GLG. I'll give you some more detail on performance in a moment. In parallel with the strong growth in FUM, our revenue margin has compressed during the half as we've won several large mandates for us in low margin mandates. Our management fees have therefore grown at a much steadier pace than our FUM. This is also reflected in our management fee profits, which have grown by 4% to CHF94 million. Meanwhile, performance fees increased to CHF51 million, demonstrating the benefit of our diversification with contributions from across the group, despite it being a period where the trend following industry largely had negative performance. So total adjusted profit before tax was up 48% to GBP145 million. In line with our dividend policy, we'll be paying an interim dividend equating to our adjusted net management fee earnings per share of $05 or 3.79p per share payable in September and that's up 10% in sterling terms compared to the 2016. Let's turn to performance across the strategies starting with the alternatives. Get that up there so I can actually see it. The market environment in the 2017 proved difficult for many trend following strategies, and particularly at the June after Draghi gave his Cintra speech, with the Barclays B Top 50 Index down 4.7%. AHL's flagship trend following program, AHL Alpha, fed noticeably better and finished the period down only 0.9%. Profits in equities and credit trading didn't quite offset the losses in energies and fixed income at the end of the period. The AHL Evolution had another strong half, finishing up 7.1%, thanks to strong performance trading credit and equity sectors and the fact that in commodities, it doesn't trade oil. AHL Dimension, with its allocation for broad range of AHL strategies, ended half one twenty seventeen with broadly flat performance. Performance of GLG's discretionary alternative strategies improved in the 2017, with the GLG alternatives composite up 3.9%, which is 1.3% ahead of the HFRX index. The stronger performing strategies including Crave and Market Neutral on the credit side and Euro Mid Cap in the equity side. The flagship equity long short strategy was up 1.2% for the period. That's above the HFRX equity market neutral index, but it is behind the global index. FRM strategies meanwhile had a reasonable performance in the first six months of the year. FRM Diversified II had positive performance of 1.9%, which is in line with the benchmark. Numerics alternative strategies were down in the first half, giving back some of the good absolute and relative performance from 2016. On to the long only side, most of GLG's long only strategies had good absolute and relative performance in the period. However, the largest individual strategy, which is Japan Core Alpha, which has a strong value approach, underperformed the topics by 4.4%. This resulted in GLG's strategies underperforming the overall benchmark on a weighted basis asset weighted basis by 1.3%. The emerging market debt total return strategy, which launched in 2016, was up 3.5% for the period. The Continental European equity strategy outperformed its benchmark by another 0.6% and UK undervalued assets strategy outperformed very strongly outperformed by 9.6%. Numeric's range of strategies had mixed performance in the first half of the year, with overall roughly flat asset weighted performance relative to benchmark. Positive alpha was generated by the international strategies, including the EM core and the global core, and that was offset by negative alpha in US stocks resulting in underperformance for small cap core and large cap core, which are both US only strategies. We saw 10% organic growth in FUM in the 2017, driven by strong flows into FRM managed accounts, GLG emerging market debt strategies and our quant strategies. Whilst it's encouraging to see such strong levels of client interest in our strategies, as I mentioned earlier, the margin on these flows, in particular the infrastructure mandates, were lower than the average for the group. As you can see from this chart, this level of net inflow was unusual and our flows continued to be uneven in nature. In the half, we had 10 individual sales over GBP 200,000,000, while we only had two individual redemptions over GBP 200,000,000. I'm afraid we wouldn't expect that pattern to be repeated in every future period. We continue to make good progress in building long term relationships with clients. And during the half, we added 12 new relationships with what we consider super league clients. We continue to see the trend of clients investing across the firm with a number of existing clients investing in new products during the period. 61% of our fund now relates to clients who've invested in products across more than one of our investment engines, 77% of our fund relates to clients investing in more than one product and 56% of our farm relates to clients investing in more than four products. From a geographical point of view, while EMEA continues to be our biggest market, we've seen strong growth in The U. S. Market over the last five years. Gross sales from The Americas accounted for 37% of the total for the first six months of twenty seventeen compared to 29% in 2016. And at the June 30, 29% of our fund was from clients domiciled in The Americas compared to just 8% at the 2012. So now I'll pass on to Mark to take you through more details. Thank you, Luke, and good morning, everyone. I'll start with an overview of the first half P and L and then I'll go into more detail on FUM revenue and costs. Compared to the first six months of twenty sixteen, net management fees increased slightly to $355,000,000 with the revenue margin compression that Luke mentioned earlier offsetting some of the fund growth. Performance fees, including gains on investments, were $106,000,000 up from $42,000,000 As Luke highlighted, the first half of this year wasn't a great environment for trend following strategies. We think that earning over $100,000,000 in performance fees and gains in that type of environment illustrates the progress made in diversifying the business. The diversification within AHL meant it earned $50,000,000 of performance fees, mainly from Evolution despite the backdrop. GLG earned $22,000,000 of performance fees from Credit, UK Equity and European MidCap strategies. Numeric up 4%, increasing slightly faster than management fee revenues. Our total adjusted PBT increased 48% to €145,000,000 primarily reflecting the rebound in performance fees to more normalized levels. Statutory profit before tax was $76,000,000 up 38%. The increased level of adjusting items in the period primarily relates to the higher contingent consideration liability as Numeric's growth rate has been faster than expected in the first half. Our total adjusted EPS was $0.75 up 53% year on year, which is faster than PBT growth, primarily due to the lower share count as a result of the buyback and a slightly lower tax rate in the half. Turning now to our thumb, I'll start with the high level movements for the year. As Luke mentioned, we're pleased to report strong growth for the half, up 19% to 95,900,000,000.0 The Alto acquisition increased by $1,800,000,000 Net inflows were $8,200,000,000 driven by EM debt, quant and FRM infrastructure accounts. And I'll take you through some more detail on that in the next slide. Investment performance was positive, increasing by $3,800,000,000 mainly due to the market moves in our long only strategies. FX moves increased FUM by $1,900,000,000 as the dollar moved through the half with the bulk of the gains relating to euro and sterling moves. Other movements reduced FUM by £700,000,000 There was £200,000,000 of CLO maturities, 400,000,000 of negative investment exposure adjustments and D Gears and $100,000,000 relating to an equity long short fund that we span out as planned post the Alto acquisition. Turning to the detail of our fund, you can see that the growth was pretty broad based. We had $2,300,000,000 of net inflows into our quant strategies across alternatives and long only, which is around 6% of opening fund. We're seeing growing interest in some of our more recent strategies with Alt Bita being a good example, and Luke will talk about that in more detail later on. We saw particularly strong growth in our fund to fund business as we won another large mandate, an existing mandate of £1,500,000,000 funded in the second quarter and other existing clients added $400,000,000 to their portfolios. This increase more than offset the outflows from the traditional fund to fund strategies, but it has lowered our revenue margin in that business, as we'll run through shortly. We had $2,600,000,000 into our discretionary business during the first half, driven by the strong flows into our new emerging market debt strategies. The outflows for alternatives were mainly in equity long short and convertibles. While nearly 10% net inflows during the half demonstrates the progress compared to 2016, much of this is driven by the success in EM debt. We think some of the changes we've spoken about in the full year will take a little longer to impact our flows, but they're already having an effect on performance. As you can see, the net inflow in Q2 billion dollars which is Mann's highest ever quarterly net inflow. As you've heard us say plenty of times before and Luke just said now, our clients are mainly institutions and our quarterly flows will be uneven with one or two mandates skewing the numbers significantly one way or the other. Q2 was unusual and we had a number of very large inflows, but no material single redemptions. It is unlikely that, that pattern will be repeated. This next slide gives a breakdown of our net management fee margins. The full detail on gross margins are in the appendix. Many parts of the business have seen little change in margin during the half. The one part of the firm that has is FRM, as the material inflows into infrastructure mandates and the ongoing outflows from traditional fund to fund strategies accelerate the transition of the business model. In FRM, we've effectively run very fast from a flows perspective to stand pretty much stationary from a revenue perspective. In Quants Alternatives, the slightly lower run rate reflects some inflows into lower fee strategies right at the end of the half. You can see that the margin actually increased to the first half actuals, reflecting the fact that we continue to sell strategies such as the Evolution at two and twenty. The move in GLG alternatives is primarily due to the lower fee one thirtythirty strategies being a slightly larger proportion of some and the slightly lower margin in Quant Lung only reflects a small mix effect within Numeric. At a group level, the run rate margin has dropped from 81 basis points at year end to 74 basis points at the June. This explains the gap between the significant increase in FUM and the steadier increase in run rate net management fees, despite most parts of the business outside of FRM seeing little or no change in margin in the first half. This slide provides a different view on the margin move at the group level just to illustrate the point that the significant majority of the change continues to be driven by mix effects. Three basis points of the move is the mix effect from net inflows during the period, particularly those two large FRM institutional flows we mentioned earlier. Two basis points come from better performance in FX gains from our lower margin strategies. Predominantly, the equity moves means that long only is now a larger proportion of our fund and that's typically at a lower fee level. There's one basis point from the guaranteed products continuing to run off. And then lastly, there's one basis point from either small pricing adjustments or the mix of clients within individual funds. As you can see, the level of margin decline in the first half of the year is directly related to fund growth, with five basis points to do with inflows or market and FX mix effects. In the same way that we expect the inflow rate to moderate, we expect the margin trend to moderate as a result. And the one overriding message that I'll leave you with again on our margin is that the movements across the group are largely about mix. However, we do manage the business on the assumption that this trend of faster growth from lower fee mandates and hence, the decline in the blended margin will continue, albeit at a much slower pace. This backdrop drives our continued focus on cost control and FUM growth in our core business. Bringing together the fund and margin trends, you can see that the bulk of the $19,000,000 or 6% increase in core management fees compared to 2016 was driven by our front business. The run off of our legacy guaranteed products continued to provide a headwind such that total growth in net management fees was 2% year on year compared to 6% for the core. On a run rate basis, you can see the continued growth in the quant business, but also the return to growth in our discretionary business with run rate revenues up 13%. As discussed before, the shift in FRM's business model means that despite strong inflows, run rate revenue has declined slightly. Run rate revenues in our core business are up 8% on that basis, although the headwind from the legacy business continues to reduce over time with only $300,000,000 of guaranteed products remaining. Ultimately, we're focused on delivering revenue and profit growth. Please don't fixate either on the inflows or the margin changes. The two are completely interrelated. And the real point to focus on is the steady revenue and management fee profit growth. Turning now to performance fees. As I explained earlier, we earned $83,000,000 of performance fees in the half with contributions from across the business and gains on investments were 23,000,000 As you can see from the chart, we had £21,800,000,000 of performance fee earning from, which was at peak at the June. 6,900,000,000.0 of that was from AHL, but please note that only £4,200,000,000 of that is in strategies where fees crystallize in the second half of the year and that primarily relates to Dimension. All of the GLG fund, which is a peak, is in strategies where performance fees will crystallize in the second half. And of the 6,800,000,000 2,400,000,000.0 is in EM debt strategies. Those strategies typically carry a hurdle before performance fees are charged, which can have a material impact on the performance fee generation. 2,400,000,000.0 was in various equity long short strategies and the remainder in a range of credit funds. 8,100,000,000.0 of numeric fund was at peak and around two thirds of that is in strategies with fees that crystallized during 2017. Turning now to costs. Our fixed cash costs for the period were $160,000,000.04 percent lower than the 2016 due to the FX benefits and cost control related to the restructuring we implemented last year. As we said at the full year, fixed cash cost guidance is $325,000,000 The bulk of the regulatory implementation costs in relation to MiFID II are hitting in the second half. Our total compensation costs have increased by 14%, less than the 19% increase in net revenue and our compensation ratio for the half was 46%, down from 48%, primarily due to the higher absolute level of performance fees. To reiterate, we expect to be at the higher end of the range in years where absolute performance fees are low and the proportion from the American GLG is higher. And conversely, we expect to be at the low end of the range when absolute fees are high and the proportion from AHL and FRM is higher. Netting at the half year was close to $10,000,000 up slightly compared to the equivalent time last year. And then lastly, asset servicing costs were $17,000,000 equating to around 5.5 basis points of FUM, excluding the American Private Markets. And D and A increased to $9,000,000 in line with expectations. We've discussed the performance of our overall business. But as you all know, over recent years, we've been transitioning the business away from the legacy business model focused on guaranteed products to our core diversified and institutional focused business of today. I wanted to touch on the performance of that core business in a little bit more detail. As we said earlier, the core business grew revenues by 6%, partly that's due to the Alto acquisition, but the majority is organic growth. We operate as one firm and we don't allocate cost by products. But to give an indication of the profit growth in our core business, you can simply take the firm's overall management fee PBT and subtract the legacy revenues. We're at the tail end of the run off process for our legacy business today and we're focused on delivering the organic growth in revenues and profits that will drive our business forward from here. Lastly, before handing back to Luke, let me run through the key points on our balance sheet. Surplus capital, after adjusting for the interim dividend, first half profits and other reserve movements and the receipt of performance fees that crystallized in June is around $375,000,000 The increase is basically our first half performance fee profits. We're currently finalizing our ICAP and this will be submitted in the coming weeks. As we said earlier in the year, we expect to update you on the process, that's our full year results next year. I'm sure there'll be some questions on regulatory capital later, but I'm afraid we're not going to speculate on the outcome of that process as it's a matter for our regulator. We do note there's been a general trend for increased capital requirements within The UK industry, but to reiterate what we said at the full year, we don't think that the ICAP process impacts on our strategic objectives for this year. On the buyback, we're 93 of the way through at an average price of £1.32 The group's credit rating was maintained at BBB plus in June, and we extended our RCF by another year to 2022. And our balance sheet remains strong with net tangible assets of 600,000,000 equating to roughly 28p per share at the June. As we previously outlined, we have a seed capital program to support the growth in new products, which is managed within a $75,000,000 bar limit. At June, the seeding book was $636,000,000 down marginally compared to year end. Overall, we maintain a prudent balance sheet. We continue to actively review potential acquisitions, but we haven't identified anything that meets our criteria at a price and structure that delivers appropriate risk reward for shareholders. Over the last five years, we've generated attractive returns on the acquisitions that have been completed, and we've been able to protect and grow shareholder capital through our discipline on structuring and pricing, and we will continue that discipline in the future. With that, let me hand back to Luke. Thank you, Mark. Right. So I'll now give you an update on the progress we've made in each of the investment engines in the first half of the year. So if we start by looking at the quant strategies, AHL and Numeric. As you can see from the charts, our quant business has diversified considerably over the past five years. Traditional trend following strategies now account for around 15% of our quant assets compared to over 90% in 2012. And we have an increasing array of underlying sources of return, including momentum, but also a wide variety of quant models, long only equities and sector based alpha capture. We saw good growth in our quant assets in the first half of the year with FARM increasing by 12%. Run rate net management fees increased by 6%, given the mix effect from the strong performance related growth in Numerics long only assets, which Mark talked through earlier. There were £2,300,000,000 of net inflows in the period, of which £650,000,000 was into recently launched formats, including our Institutional Solutions area. AHL has played a major role in the group's investment solutions initiative and now has 1,400,000,000 of assets in institutional solutions, which as the name suggests, provide bespoke solutions for, guess what, institutional clients, giving them a flexible combination of AHL's different strategies. There were sales of roughly €400,000,000 of Evolution in the period following the opening up of €500,000,000 of additional capacity earlier in the year and the remaining 100,000,000 was just a timing question. Due to capacity constraints, dimension and evolution are now soft flows. We're seeing continued interest from clients in other AHL strategies, notably that Institutional Solutions offering and also the alternative risk premium strategies, which I'll come to later. Turning to numeric, as well as its expanding geographic coverage, we continue to work on diversifying our client offering into a number of newer strategies. Towards the 2016, Nemak launched a mutual fund on its integrated Alpha strategy, which expanded their hedge fund offering into The U. S. Market. This has progressed well with sales of over €350,000,000 in the period. Numeric continues to benefit from the group's client relationships with institutions around the world. Cumulative gross sales since the 2014 acquisition have been $14,700,000,000 of which more than 50% has come through Mann's existing sales force channel. Numeric and AHL have worked together with FRM during the year to develop our alternative risk premium strategy, which performed well in 2016 and which we're now offering to clients, but I'll come to that in more detail in a minute. Edge Shell has also expanded the focus of their research in machine learning and data analytics, providing growth opportunities from utilizing new research techniques and new forms of data. This initiative continues to develop and a number of new machine learning based signals have been added to dimension, alpha and diversified programs this year. Now let's look at the progress we've made at GLGs. FARM increased by 17%, driven by strong growth in the long only part of the business. We saw an improvement in performance across a number of strategies and clients have continued to allocate to our EM debt strategies through the first half. Alternative performance improved noticeably. And also beyond the absolute returns, we think the solid performance through the big binary events such as The UK and French election provided some early evidence of the impact of the risk management changes we made in 2016 having a positive effect. We need to keep delivering more consistent performance for our clients at GLG and that remains our priority. When we do that, the flows follow. GLG's core strength of attracting and growing investment talent remains intact as demonstrated by the strong flows into recent launches. As we've explained, we continue to see excellent growth in emerging market debt strategies with GBP 3,400,000,000.0 raised in the first half and therefore GBP 4,400,000,000.0 raised since the strategies were launched at the end of the 2016. Other performing strategies, including undervalued assets, Continental Europe and the European Mid Cap, all continued to raise assets. There were, though, continued outflows in alternatives and we will need to see a more sustained period of improved performance to return to net inflows here. We continue to take further steps to improve our long run performance and we're combining the investment teams in one London location, this one in October, and this will help with collaboration and knowledge sharing across the two teams. At GLG, we're also increasing investment in applying quant techniques and machine learning to help improve their analysis of data and thereby help improve their decision making. We're encouraged by the progress that was made at GLG in the period. We think there's a lot more potential for improved growth. Moving on to FRM. So we saw 27% growth in assets in the first half of the year, driven by net inflows of CHF3 billion. We continue to see a lot of interest from large institutional clients in our infrastructure offering, particularly from North America. A previously awarded infrastructure mandate from a U. S. Large state pension plan funded in the second quarter, adding CHF 1,500,000,000.0 of AUM and existing clients added a further CHF 400,000,000 to their portfolios through the half. But we are also seeing interest in advisory and portfolio services from clients looking to build bespoke hedge fund portfolios using Efrain's full toolkit. And in the 2017, an existing client allocated a further CHF 1,300,000,000.0 to FRM to provide portfolio services. FRM's redemptions were around CHF 1,000,000,000 in the half, the majority of which are from the traditional higher margin funder funds. These assets continue to decline as investor appetite for these products is subdued, reflecting long term industry trends. But many of these assets can be recycled into direct MAN alternative products. FRM's business model, therefore, continues to shift to that of a solutions provider with particular emphasis on developing services, which can leverage off the scale and wide reaching capabilities of the whole Mann Group. We're pleased with our success in providing FRAM skill set to clients in a new way, But this shift in the business model is also reflected in the lower run rate net management fee margin of 49 basis points that Mark talked about. And this means the overall run rate revenues at FRM actually declined slightly despite the strong thumb growth. Moving on to our new Private Markets business. So we launched this with the acquisition of Alto in January. The acquisition completed and assets have grown over the $05,000,000,000 to €2,000,000,000 with net inflows of €300,000,000 But since the acquisition closed, existing Alto clients have launched three new mandates within The U. S. Real estate debt strategy, one upsized an existing real estate equity mandate and another launched a new U. S. Residential real estate equity separate account mandate. We're really pleased in the confidence that these existing Alto clients have shown in the integration into MAN and the fact that the business really hasn't missed a beat post the deal. In addition, we're encouraged by the level of interest shown by Mann's clients and prospects for this new asset class demand. The sale process obviously takes longer here than in some other parts of our business, but there's been very strong engagement today. So I wanted to finish by talking about something on product innovation. And often we throw lots of small pieces out and then you're not quite sure where they are. So I wanted to focus on one particular thing and the work we do on developing a next generation of products. Markets don't stand still and you need to keep innovating to serve your clients. And we invest a huge amount of time and energy in that. If we do our job right, we will always have various products that hit their capacity. That's a good thing. And we soft close them to ensure that we keep delivering returns for clients. But we'll also have new strategies we've researched and tested and developed that can help clients in new ways. The Van Alternative Risk Premium is a good example of a product that's been developed over the past few years and it leverages multiple areas of the firm. SRM's own portfolio construction process has made clear the benefit and the need of a liquid cash efficient strategy, which allows for performance across varied market conditions while aiming to be uncorrelated to traditional assets that could go into their overall portfolio. At a minimum, it allows allocators like FRM, but obviously like our other clients to improve returns on parts of a portfolio that might otherwise be held in cash. Alternative beta strategies have become increasingly popular recently with a lot of coverage. So F1 worked with AHL and Numeric, they've got thirty years of experience to develop a multi premier, multi strategy, multi asset approach allocating across four broad alternative risk factors. The systematic trading strategies then have multi level risk management and leverage across all of the different things going on at MAN. F1 worked with sales and product structuring to provide a suite of flexible solutions to meet the individual client requirements. Importantly, the strategy is extremely scalable as it utilizes capacity in the most liquid instruments, otherwise unutilized in AHL or numeric. Strategy is up 8.6% since inception in 2015 and we started marketing it to clients around the world and we're seeing very strong interest with £500,000,000 of assets raised in the first half and a decent sales pipeline. Importantly, it's already opened a number of relationships with half a dozen major investors, including sovereign wealth funds, public pension funds, and even insurance companies. So before I open it up for questions, I just wanted to give a little sort of summary of where I think we've got to. Looking at the current trends in asset management that you're all writing about, we feel we're well positioned for three reasons. In an industry where clients generally either want cheap beta or real alpha, We have a focus on delivering true high alpha strategies and we think clients are looking for those. Secondly, our institutional and relationship focus means we're well positioned to be a beneficiary of the continued trend for large institutional clients to put more money to work with fewer managers. And thirdly, clients are increasingly interested in an accepting of quant approaches. And obviously, we have a heavy quant focus in the firm. When I took over, I talked about our first two priorities of turning around GLG and increasing the productivity we get from our distribution platform. The investment performance, risk management outcomes and flows have all improved at GLG and hence its profitability is improving. There's a lot more to do, but we do feel we're now heading in the right direction at GLG. Even allowing for one off effects, it's clear that the new sales management process is increasing our reach and penetration with our client base. Overall management fees, profits and run rate revenues have grown at a steady rate. Performance fees have returned to a more normalized level and it's led to a rebound in our overall profit. I agree with Mark. I think earning GBP 106,000,000 of performance fees and investment gains in a period where trend following benchmarks are negative illustrates the progress we've made in diversifying the business over the past five years. The foundation for the firm is just much stronger today and much broader. We're pleased to have delivered net inflows in the period, which illustrates our clients' confidence in our strategies. And again, just to repeat, the first half was unusual in both the scale of the inflows and the level of the margin compression it created. We'd expect both to moderate in the second half, particularly given the institutional bumpiness. We've made solid progress in the first half of the year, but clearly we can keep improving. As ever, our focus is on delivering long term performance for our clients. That's what drives the success of the firm and everything follows behind it. So with that, I'll open it up for questions. Thank you. Go on, Peter. Is there a mic? Sorry, I didn't see you. Good morning. It's Peter Lohr from RBC. Just a question for you, Mark, on your cost guidance. What will the eventual impact be to the cost base of consolidating the London locations in this building? Thanks. So it's single digit million of cost savings next year. We'll update you in full on 2018 cost guidance because while we've got cost savings from the real estate consolidation, we've clearly got some of the cost increases from MiFID II and those will firm up. So you'll get the full number at year end, but it's single digits. I'm not sure want to ask a question now. Just a couple of things. Firstly, when you look at the alternative risk premium, it's really interesting product, but where will we see that in the FUM? And what sort of yield does that generate? And secondly, it's really clear disclosure on the FRM business, but what are the revenue yields of the different buckets you split out there? And also what is the profitability of each of is? So if you get one of these large infrastructure mandates, how profitable to that is that to you in terms of operating margin? Well, okay. For a man who wasn't going to ask a question, there's quite a lot in that question. So we'll answer some of those pieces and there's a couple where you're getting too detailed, I suspect. In terms of the alternative risk premium, the funds under management flow down to what we always account for funds under management once and we let them flow down to the lowest level where they sit. So the funds under management will appear in AHL or in numeric and the field is as good as the man's standard. Probably a good way of answering that. Is that a fair way of describing that? The alternative risk premium stuff doesn't generally come with a performance fee, but it comes with a surprisingly healthy management fee. I would say that was the first one. Yes. And then on FRM, so some of the inflows are coming in at some of the lower levels that we see within the firm. We previously said that's sub-forty basis points and that's as much detail as we'll go into. And clearly, historic business is running off closer to one or north of one. So you get quite a big mix effect from those two. It's all profitable business on a contribution basis. But again, we're clearly not going to disclose product by product profitability margins, but we're still comfortable that it's significantly additive to the firm. I think the other bit that's important on these infrastructure mandates is what they do is embed us within the investment process of our clients. They can't do anything in the alternative space without talking to us really early in the process. And so you can imagine there is plenty of opportunity to talk to the client about other ways we can help them through that process. That really is a cross buying opportunity. Morning. It's Henri Jeblai from Exane, please. Three questions. Firstly, on AHL, could you talk about the rate of gross outflows? Currently, in Q2, stands at about 5%. It seems like the duration of assets in AHL has increased. I understand that evolution and dimension given the demand capacity constraint, but even the traditional AHL seems like duration has increased. Could you perhaps go behind why that is? Secondly, I was looking for some margin dynamics in AHL. Some of those sales have been institutional. Could you indicate perhaps the level of management fee margins attached to the gross inflows and the gross outflows? And finally, could you comment in terms of where you're still looking at doing bolt ons? Thank you. I'd only work out which of the numbers you'll give. I'll just talk about so the duration of assets have definitely lengthened, if that's the right phrase, at AHL. And it's done it because that's what happens when you transition to an institutional business. So as you know, across anything in asset management, retail turnover and institutional turnover are markedly different. That was true at AHL. So today, it is in very large majority an institutional business and duration feels like it would do in other institutional asset businesses. I don't think there's enough data to give you an exact answer on it. But if you think about that sort of traditional metric in institutional or whatever it is, seven year average holding period and in retail, it's one or two year average holding period, you don't end up in the wrong place, I would say, and there's not that much of the retail business left there. And on the sort of margin dynamics within AHL, the key point really is around some of the alternative risk premium coming in within AHL because that's where it's managed. So as Luke says, that's coming in at close to the group's average margin. That's why you're seeing a little bit of a drop in the run rate even though the first half actuals were actually up compared to the run rate at year end. So it's mostly that dynamic. If alternative risk premium grows in the way that we think it can, that's going to have an impact on the margin there, but that's just new business coming different level. And you can see clearly that the first half actuals actually increased, which is partly things like Evolution coming in at $220,000,000 And then in terms of the question about acquisitions, we are always looking to add teams. I'm a believer the more different sources of alpha we have to deliver to clients, the better it is in terms of our ability to give client solutions. But we don't start by saying, I want one of those. What's the best one I can find? In ALFA space, I don't believe that worked. I spent years sitting in investment committees of a fund of funds business trying to guess where ALFA was going to be next year and it's a miserable exercise and you don't add value. It's really important in my view that what you do is start by saying what we want are teams with real alpha with a repeatable process. So firstly, we look around for teams, whether it's through hiring a team or acquisition that we think has true alpha and a repeatable process. If you're not adding value, you shouldn't be in the active fund management business. So we need to make sure they add value. Secondly, they have to believe in the things that we believe in at LAN, be the sorts of people we want working at the firm. And then thirdly, they need to not be doing something we already do. I don't want two teams doing the same thing because that creates internal competition and internal competition creates bad behavior. We'll look at anything on those three metrics. If it passes those, then you have to make the economics work. Now it's easier to meet the third criteria in something in private markets because we don't have very much in private markets. So you're less likely to trip over the do we do it already. But actually, one of the teams that we added in the first half of the year that I think over time will be a really good addition to the firm was a European equity income team. Now, you'd ask me what's the area that we have most covered, I'd have said European equities. But actually, we didn't have income covered. We didn't do income in European equities. It's an incredibly high quality team. We've got a chance to what's that awful word you call it? Equihar. We sort of they've been at Fidelity, they've been sorry. They've been very successful at Fidelity. They span out, tried to do it on their own, couldn't really raise money. So we absorbed their business. And I think there'll be a great team for us over time. Were we looking for European income? No. But it meets those three criteria, so we'll carry on. So that's the case. The answer is there's an awful lot of different businesses around in asset management, which are wondering about their future. And so there's a lot of things to look at, but we don't start by we want one of those. We starts by is it the quality we want. Hailey? Thank you. It's Hailey Town from Citi. Two questions, please. Firstly, just to get on the costs. I know you said that the regulatory costs will be more in the second half of this year and that you'll give us some guidance for next year later on. But just so I can understand how to think about regulatory costs. Are there any sort of one off extra costs we're seeing this year which won't repeat? Or is it really just an ongoing higher level? To get an idea of the thinking there. And then the second question, just in terms of the GLNG U. S. Distress fund you mentioned has been a big contributor to gains. Can you tell us how much of the $636,000,000 seed is actually in that fund and whether that's something that's going to be launching soon? Thank you. Sure. So on the cost side, you really have two splits. You've got the implementation costs hitting in this year. So those are clearly primarily one off, but you then switch to the ongoing administration costs next year. So the cost increase in the second half is primarily implementation. And then 2018 is going to move into the ongoing running costs, whether that's additional compliance folks, additional systems, all these sorts of things. And in terms of the seed capital, the distressed funds approximately $200,000,000 of seed at the half year. And the funds got a two year track record now and is open for clients today. Morning. Daniel Garriff from Barclays. I've got a couple of questions on GLG. You mentioned further progress to come on the improvement in profitability there. Wondering how that sort of splits out cost versus revenues. We know, obviously, about the sort of real estate consolidation within Sunlight that was having a major impact on costs. Any other color on what else might come there? And secondly, you have 92% of GLG within 5% of Highwater Mark performance contributions, what, 22,000,000 in the first half. Your optimism that sounds like it's at the sort of record levels of within 5% Highwater might be a sort of optimism that you can have better 2018 versus that 2022? Thank you. If I can predict performance, I think I would just trade my own PA rather than running a business. Look, I think we've made a lot of very important changes in GLG, which I'm a big believer will help our performance, whether it's through quality of people, whether it's through the way people are working together, whether it's through the risk management process around it. But the second half will give us what the second half gives us. And I don't think one could predict that at any point type of thing. But I'm sort of more confident that we will extract the value out of what's available than I have been for some time. And the reality in terms of the there's a number of things that we can keep improving what we do at GLG. But in terms of the profitability, what one's really talking about is getting flows into a broader range of strategies. There are a number of funds at GLG, which are sub to scale that we'd like them to be. That's probably the thing. So if we can deliver on performance, then we can deliver on flows and then we deliver on profitability. But that's sort of fairly simple in my view about asset management. The hard bit is delivering on the performance, but if you deliver on that, everything flows from behind that. And as we've seen, investment performance on the alternative side was noticeably better in the first half, but flows in the alternatives weren't yet. It takes some time to turn around convincing people that you've really done what you think you've done in terms of improving performance. Paul McGinniss from Shaw Capital. With respect to the surplus capital, are you waiting until you get the other side of the regulators view on your ICAP submission before you decide to extend or start a new buyback given that the current one is almost completed? No. We thought we should at least finish the first one. So as we say, ICAP process doesn't change our strategic priorities for this year. That means we don't feel constrained in terms of what we're doing in the short term because of it. And certainly, at the scale of capital deployment that we're typically used to, whether it be deals or buybacks. So no, it's not that the two are interrelated. Go on, Rebecca. No, no, Rebecca. Thank you. It's Anil Sharma from Morgan Stanley. Just two questions, please. I think you mentioned within FRM, you've either had success or you think you might have some success at researching some of the legacy fund of funds into the new products. Could you give us an idea as to what proportion of assets you've either done that on or what you think you will do it on? And then some of the historic acquisitions, particularly numerically, are they going very well. So I'm just wondering what amount of capital they're going to consume as you have to pay the contingent consideration for those deals? I'll take the first one. You take the second. So we have been pretty successful at maintaining the assets. So a lot of those legacy assets are from Japan, which was FRM's core strength before and our Japanese assets under management, I'm looking at John, but it's essentially flat over the last two years despite the outflows from the fund of funds business. What that's happening is recycling it into other things through FRM's process of becoming a solutions provider and a service provider. In many ways, they end up being a feeder process into other parts of the firm. So for instance, I mentioned in the presentation, the alternative risk premia assets wouldn't have come without FRM, but they don't it's not an FRM product and they don't show up under FRM's assets. So it's but the recycling is happening, touchwood reasonably effectively. And on the capital in relation to historic deals, so the details on Page 42 of the appendix, but just to talk you through on numeric specifically. Today, we've got $165,000,000 as the contingent consideration creditors. So that's already consuming capital effectively. There's a maximum additional amount of up to $110,000,000 if the business hits the maximum milestones for the final payment. And you see that come through in two ways through time. One is the unwind of the time value discount, which goes through net finance line. And then to the extent that it's performing above budget, the consideration also increases for that. So you've got $165,000,000 in today. The maximum extra capital consumption that it could create is 110 Clearly, that's a problem that we'd like to have. Yes. Just that bit on the structure of deals and the way we organize them. If we get to pay the maximum potential consideration for any of the acquisitions we've done, that's a reason to have a party. It means we bought it very, very cheaply. Hi, it's Gertrich Hammer, JPMorgan. Just two questions. Firstly, on The U. S. Business, you've clearly seen good gross sales and AUM momentum there. Can you provide a bit of color in terms of what products those flows are going into? And if any particular distribution channels are working well in The U. S? That's the first question. Secondly, just on the soft close in Dimension and Evolution, is that still open for existing clients? Just to understand what those soft close actually means. So in terms of The U. S, the channels are particularly large, well known public and other pension funds. One of the interesting things I think in The U. S. Is that you have a lot of very well known names that you would imagine would be the most overgrowth people out there. And they get hundreds of phone calls a day. But the phone calls are just, I want to sell you this, I want to sell you this, I want to sell you this and they don't take them. The bit when we turned up saying, can we understand what your issues are and see if we can help? It's amazing how receptive they've been, to be honest, and how many good conversations we're having. And so it's particularly there. I would say The U. S. Wealth channel is not yet humming for us. And in terms of product, I mean, it's reflective of the rest of the firm, would be the simple thing. But we've definitely been helped by the fact that until, call it, three years ago, The U. S. Pension market was not a particular buyer of CTAs and they've become more so. And obviously, it's an easy conversation for us to start that one. Is that both questions? The other was just on the soft close where there's a little bit of extra money that can come in through the second half from clients, which is finalizing their process. But we're not marketing it to any new prospects. Thank you. Good morning. It's Tom Mills from Credit Suisse. Just a quick question on the EM debt business. Obviously, you've done phenomenally well in the year since that's been up and running. I noticed that performance had sort of lagged a bit on a one year basis because maybe it wasn't working so well on a style basis for the manager there. I'm just wondering, is your perception that the flows there are structural in nature? Or do you think that could be slightly more flighty, like the more macro driven Japan core alpha flows just to get a feel for how they might move around? So the answer is the PM is bearish on EM at the moment. And so unlike most people in EM who are well long beta in that sector, he's not at all. I mean, he's sure beta relative to the benchmark in the things which are benchmark relative and very underweight in the total return fund. That creates a performance. If there's a sell off in emerging markets, he will outperform massively. And if there isn't, he'll underperform. But his clients understand that and like him for that. I think the flows are structural in nature, But there is an element whereby there's a point where performance affects everybody, if you see what I mean.