Earnings Call: H2 2015

Feb 24, 2016

Good morning, ladies and gentlemen. As an Arsenal supporter, I'll be even more somber this morning than I'm usually are. And thank you for joining us. What we're going to do as usual is I'm going to start by giving you a brief introduction. Jonathan will then take you through the numbers in detail, after which I will come back to talk about performance and business development with an emphasis on assessment of our progress over the last three years. I will then give you our outlook and we will throw it open for questions. Performance across our investment managers during 2015 was mixed, but reasonable against the difficult market backdrop. There were a range of return across AXL strategies with momentum strategies impacted by market volatility during the year, but the Dimension multi strategy program delivered strong performance. GLG equity long short strategies had a good year and the majority of the long run strategies were ahead of benchmark, albeit certain strategies were somewhere behind. Numeric posted strong outperformance versus benchmark for another year and FRMs performance was nothing but solid. Flows were slightly positive with net inflows of $2,900,000,000 in the second half of the year, more than offsetting net outflow of $2,600,000,000 in the first half. While this outcome is not as strong as we would have liked, it is again a reasonable result in the circumstance. The acquisitions of SilverMine, New Smith and BAML front of front business together with strong loan only investment performance drove an 8% increase in funds under management to $78,700,000,000 at the 12/31/2015. Adjusted profit before tax decreased by 17% versus 2014, mainly due to lower AHL performance fee following a strong 2014, while adjusted management fee profit before tax of $194,000,000 was broadly in line with 2014. In line with our dividend policy, we will be paying a final dividend equating to adjusted net management fee earning per share of $0.48 or 3.4p per share payable in May. This year, we have decided to return all of the surplus capital generated by the business to fund potential acquisition. Last year, we will view a large number of acquisition opportunities, but we found that transaction were unavailable on sufficiently attractive terms. The board believes that given evolving market dynamics, there is sufficient probability of finding attractive acquisition to execute this year that we have decided to retain all of our surplus capital. Conditions may of course change and we will keep the situation under review in the course of this year and retain the ability to execute buyback if advantages to do so. I will now hand over to Jonathan to take you through the numbers in more detail. Thank you, Manny, and good morning. Let's start off by looking at the movement in funds under management for the year. 2015 saw a 5% increase in gross sales to $22,900,000,000 with strong quant sales being partially offset by lower sales of GLG equity long short strategies compared to 2014. The majority of the demand continues to come from institutions and gross sales for the year included three institutional mandates totaling $2,400,000,000 into AHL Dimension and AHL Alpha, a $2,000,000,000 managed account mandate from a North American pension fund and a $1,100,000,000 mandate from a single sovereign wealth fund client investing into two numeric strategies. Redemptions were $22,600,000,000 for the year, up from $18,600,000,000 in 2014, with this figure including $2,800,000,000 of redemptions from one client in the Japan Core Alpha strategy despite long term strong performance and $1,000,000,000 of redemptions from our North American equity strategy. During 2015, investment performance across our four managers increased funds under management by $2,400,000,000 reflecting strong absolute returns across our quant alternatives and discretionary strategies. Manny will talk about performance in more detail later on. Non functional currency is U. S. Dollars and funds under management are reported in dollars. During the year, the strengthening of the dollar reduced fund by $2,400,000,000 of which $1,300,000,000 related to the Euro, dollars 600 to Sterling and $400 to the Australian dollar. The detailed breakdown of fund by currency is set out in Page 33 of the appendix. Included in the other category were silver mine, Pember and Ortle CLO maturities totaling $1,000,000,000 partially offset by net positive investment exposure movements of $400,000,000 We've included further detail on the contractual schedule of CLO maturities in the appendix to the presentation. The guaranteed product gearing movement for January and February is net zero. The rule of thumb at current levels of market exposure is that every one percentage point of positive AHL performance results in a regear of $15,000,000 whilst every one percentage point of negative AHL performance results in a $30,000,000 degear. Please be aware, however, that we're guaranteed product fund at such a low level. There are a number of variables, which could impact these movements. This next slide gives a breakdown of gross and net management fee margins. In aggregate, our total net margin has decreased from 114 basis points to 96 basis points compared to twenty fourteen. Now that we have a substantially more diversified business than historically has been the case, to assess meaningfully our margin trends as a business, one needs to look at movements within each product category. The quant alternatives gross and net margin reduced by 50 basis points and 40 basis points, respectively, compared to 2014. This was due to the impact of including Numeric's alternative fund for a full year and the addition of the large institutional mandates I described earlier, which were the blended margin of under 100 basis points. The roll off of the high margin retail back book, where the blended net margin was over two fifty basis points, reduced the margin further. The run rate net margin at the 30 adjusting for the full year impact of including the AHL institutional mandates won during the year, is 145 basis points. Looking forward, we would expect the mix shift towards institutional money to continue, and hence, we would expect the overall margin to decline further. Gross and net margins in the discretionary alternatives category reduced by 32 basis points and 26 basis points, respectively, compared to twenty fourteen. This was due to the inclusion of the Silverline assets, which have an average margin of around 40 basis points and due to redemptions out of the European long short strategy, which were at a higher margin than the average for this category. The reduction is lower at a net level due to the release of about $5,000,000 of historical commission provisions, which are no longer required. The gross and net margin in the alternatives fund to funds category decreased by three basis points and six basis points, respectively, in the period. This was due to the inclusion of the acquired BAML fund to funds assets and a continued mix shift towards managed account mandates. The run rate net margin of the 12/31/2015 in this category is 70 basis points due to the inclusion of the $2,000,000,000 North American pension mandate. This margin will decline Further, as another infrastructure mandate won in late twenty fourteen funds over the next twelve to eighteen months and as more generally, the business shifts towards lower margin managed accounts and away from traditional funder funds. The long only quant gross and net margin remained stable at 34 basis points compared to 2014 as the Numeric assets acquired in September 2014 have a similar management fee margin to the existing MSS assets, albeit around 40% of Numeric's long only assets earn a performance fee with an average of 12% over the benchmark. The long only discretionary gross and net margins have increased by four basis points and seven basis points, respectively, largely as a result of the $2,800,000,000 of Japan core alpha redemptions mentioned earlier, which were at a lower margin than average for this category. The guaranteed net margin increased by 59 basis points compared to the year ended thirty one December 'fourteen. The increase in net margin was due to placement fee write offs in 'fourteen, totaling $7,000,000 Let's now look at net revenues in more detail. The main driver of the 3% increase in gross management fee revenue and the 6% increase in net management fee revenue was higher average fund levels as a result of acquisitions, partially offset by the decline in the blended management fee margin. External distribution costs were 26% lower than 2014. This was firstly due to lower retail cost alternatives and guaranteed products fund, both of which have higher external distribution costs associated with them and secondly, due to the release of the commission's provisions, which I just explained. The best way to model external distribution costs is to model gross and net revenues using the margins we provide with the difference between the two attributable to external distribution costs. Gross performance fees of $3.00 $2,000,000 were 11% lower than 2014 due to lower performance fees from AHL, partially offset by higher performance fees from Numeric. Of AHL's $218,000,000 of performance fees earned in twenty fifteen, dollars one hundred and ten million were earned from Diversified and Alpha strategies, 58,000,000 from Evolution and $44,000,000 from Dimension. As at the 12/31/2015, 42% of AHL open ended FUM or $7,000,000,000 was a high watermark and the weighted average distance from high watermark for open ended FUM was 3.6%. Given the positive performance during January, 72% or $11,800,000,000 was a high watermark. Numeric performance fees were $40,000,000 with the majority being earned from alternatives, international and U. S. Large cap strategies. Around 70% of the $37,000,000 of GLG performance fees were earned from U. And European equity alternative strategies, with the remainder earned from the credit funds. As of the December, 34% of GLG's performance fee eligible assets or $3,700,000,000 were at high watermark and 38% or $4,100,000,000 were within 5% of high watermark. However, given market moves during January, this position has deteriorated to about 1% or $160,000,000 of assets being at high watermark and 21% or $2,200,000,000 being within 5% of high watermark at the January. The $7,000,000 of FRM performance fees came from a range of their products. We've included additional detail on thirty six and thirty seven of the appendix to assist with modeling performance fees. Finally, investment gains were $24,000,000 with around $15,000,000 relating to gains on the residual balance of less liquid assets and $9,000,000 relating to the mark to market gains on our liquid seeding investments. There was a mix of gains and losses in our liquid seeding portfolio with gains on the equity interest in our CLOs and numeric funds and other investments offset by losses on GLOG seed investments. Moving on to costs. This slide gives a more detailed breakdown of movements year on year. Compensation costs for the year were $462,000,000 compared to $391,000,000 in 2014, an increase of 18%. Within this, fixed compensation costs were $177,000,000 compared to $155,000,000 in 2014, with $10,000,000 of the increase being due to a less favorable hedged sterling rate in 2015 versus 2014, coupled with a $12,000,000 impact from acquisitions. Fixed compensation costs may be slightly higher in 2016 and more in line with the previous guidance given at $185,000,000 This is due to the inclusion of twenty fifteen acquisitions for a full year, some base salary increases and the fact that we continue to invest in investment management talent to grow the business, all of which is partially offset by a more favorable hedged FX rate compared to twenty fifteen. Variable compensation costs were up $49,000,000 to $285,000,000 The $19,000,000 or 12% increase in management fee related variable compensation was largely due to higher management fees earned as a result of current and prior year acquisitions, in particular, Numeric. Performance fee related variable compensation increased by $30,000,000 despite a drop in performance fee revenue. The increase is due to higher compensation related to the GLG European equity long short strategies, where teams are compensated based on the gross trading profits. Although the teams generated positive performance in 2015, Overall, the strategy did not earn material performance fees as given negative performance in 2014, we started 2015 well below high watermark. The total compensation to net revenue ratio was 43% for the year compared to 36% in 2014. As we've said previously, we expect the total compensation to net revenue ratio to be in the range of 40% to 50% depending on the mix of revenues. In years where the mix is more skewed toward GLG, the ratio will be at the higher end of the range. In years where the mix of revenues is more skewed towards AHL and we have material gains on investments, the ratio will be at the lower end of the range and could be off the bottom of the range where we have a significant level of AHL performance fees and minimal GLG performance fees. Other costs of $177,000,000 were in line with 2014. Of this, cash costs were $161,000,000 which is 7% higher compared to 2014, reflecting the impact of the less favorable hedge sterling rate in 2015 and to a lesser extent, the costs of the newly acquired businesses partially offset by continued efforts to remain disciplined on costs, which has resulted in a lower underlying cost base compared to 2014. We would expect other cash costs to remain at a similar level for 2016, with the impact of a more favorable hedged FX rate for 2016 being offset by certain investments in the business and inflation. As we explained at the half year, our capital expenditure is increasing and is now expected to be around 40,000,000 to $50,000,000 in aggregate over the next two to three years as we carry out a number of technology related projects. We have included guidance on CapEx and depreciation and amortization for 2016 in the appendix of the presentation on Page 39. Asset servicing costs for the year were $32,000,000 which is 19% higher compared to last year, driven by an increase in average fund and the reclassification of certain asset servicing related costs that had historically been included in fixed compensation and other costs. There are currently no asset servicing costs associated with Numeric's assets because the majority of their business is in managed accounts. However, as their UCITS business grows, this could change. For the rest of the business, the cost works out at around five to six basis points of average fund, albeit this figure can vary depending on transaction volumes, the number of funds and fund NAVs. Finishing the P and L review with earnings. As Manny mentioned, total adjusted profit before tax was $400,000,000 down 17% compared to last year. Adjusted net management fee income was $194,000,000 versus $198,000,000 in 2014. Adjusted net performance fee income was $2.00 $6,000,000 down 27% from 2014 as a result of lower performance fees from AHL and higher compensation costs at GOG, as I just explained. Adjusting items were $216,000,000 in total, bringing statutory profit before tax to $184,000,000 The adjusting items include $92,000,000 of acquired intangibles amortization, dollars 62,000,000 relating to the revaluation of earn out payments, principally for Numeric as the deal has performed more strongly than expected and $41,000,000 relating to the impairment of goodwill and FRN announced in the first half. Adjusted earnings per share for 2015 were down 14% to $0.02 $11 per share. Adjusted management fee earnings per share, the basis for the dividend which Manny set out earlier, was $0.01 $02 The effective tax rate on adjusted profits was 10% for the year, which is consistent with the effective tax rate for 2014. This is lower than the underlying tax rate of around 13%, primarily due to the release of $17,000,000 of tax provisions that are no longer required. The underlying tax rate of 13% in 2015 is lower than the underlying tax rate of 17% in 2014 due to a lower UK tax rate and a higher proportion of profits earned in The U. S, where we're paying a minimal level of tax. As we have previously explained, we have $225,000,000 of U. S. Tax losses, which we can offset against future profits from U. S. Entities. In addition, we have $537,000,000 of tax amortization of goodwill and intangibles, predominantly relating to Numeric and Orhill, which will be amortized in The U. S. Over the next fifteen years and which will reduce U. S. Taxable profit in future periods. To finish off, let's look at our capital position. Our balance sheet remains strong and liquid with net tangible assets of $7.00 $4,000,000 or $0.41 per share at the 12/31/2015. As we have previously outlined, we have increased the capacity of our seed capital program to help grow the business as we launch new products over time. The book is sized in accordance with the VAR limit of $75,000,000 and in aggregate stood at $526,000,000 at the 12/31/2015. We expect the aggregate size of the book could reach up to $700,000,000 but will continue to be managed within our limits. Further detail on the composition of the C book is included in the appendix on Page 15. Surplus capital at the 12/31/2015 was $453,000,000 which has increased from the December 31 position of $419,000,000 due to the inclusion of $113,000,000 of H1 twenty fifteen post tax performance fee earnings, partially offset by the increased intangibles deduction related to twenty fifteen acquisitions and an increase in the size of the ceding book. Surplus capital is around $480,000,000 after including H2 twenty fifteen profits, which are not included in the 12/31/2015 figure until they've been verified and the payment of the final dividend. As we mentioned at the half year, we submitted our scheduled biennial ICAP to the FCA in respect of our capital requirements. To date, there has been no change to the internal capital guidance scale that is applied as part of the calculation of the financial resources requirement. With that, I'll hand over to Meny. Thank you, Jonathan. I want to spend the remainder of the presentation talking about the progress we have made against our key objectives over the past three years and given that the restructuring of the firm is now complete, where we see the opportunities for growth going forward. Quants, let's start by looking at the Quants business comprising AHL and Numeric. Since the financial crisis, our focus at AHL has been to build a much broader diversified global quantitative investment management business, which does not just rely on traditional trend following strategies. Clearly, government intervention in financial markets are simply the threat of government intervention in the five years or so after the crisis had undermined effectiveness of traditional trend following strategies. While recognizing that the traditional trend following will continue to be very important to us, we have been able to achieve a goal of building out and diversifying our quant business, both organically within AHL and inorganically through the acquisition of Numeric. Most importantly, our performance over the last three years has been strong on an absolute and relative basis. Our traditional trend following products, Alpha and Diversified have annualized returns of 7.18.1% respectively over the last three years, while our newer fund Evolution and Dimension have annualized returns of thirteen point two and eight point five respectively. This performance plays AHL strategies in the first or second quarter compared to its peer group. Numeric performance was before and after our transaction has been very strong with asset weighted outperformance of 2.8% in 2014 and three percent in 2015. Over 90% of Numeric current quantitative strategies have outperformed the benchmark of one, three five years. Within AHL, with the development of new products such as Evolution and Dimension, we have been able to diversify the business, raising over $6,600,000,000 for new strategies over the last three years with approximately 60% of assets under management in AHL now comprising non traditional strategies. With the development of this funds, AHL's business has become increasingly institutional in nature with over 70% of assets now coming from institution. With the addition of Numeric in 2015, we doubled the size of our quant business, taking it to a combined $35,000,000,000 and added a world class long only quant equity capability. Performance since the acquisition has been very strong and sales volume encouraging. Overall, assets have increased from $15,200,000,000 to $19,000,000,000 within with $6,500,000,000 of gross sales and $4,000,000,000 of net flow since the acquisition. The integration has gone remarkably well and we have found good opportunities for Numeric to work with our other investment engines in a variety of areas. We'll continue to build our quant business with new products such as Evolution Frontier and Target Risk and are providing increasingly tailored solution in quant strategies, incorporating both traditional and newer products for large institutional clients. We have every confidence that all the time through Numeric and AFL, we will be able to build a leading business across quantitative investment strategies. Let's now move to GLG. Our performance on the alternative side of the business has been somewhat disappointing over the past three years. On an absolute basis, we along with the rest of the industry have had a challenging few years. We have outperformed so on a relative basis with GLG returning 3.1% on an asset weighted basis, while the HFRX has returned 2.6%. As a result, we have not been able to attract a significant amount of capital to our business over the last three years. This fund that has performed well have tended not to offer a substantial amount of capacity for new money. Our credit fund, market neutral, euro distress and CRAVE have good risk adjusted track record that compare favorably with peer groups, that have limited capacity. Our European equity long short business has had a mixed record over the past three years with good years in 2013 and 2015 offset by a weaker 2014. The performance of the newer strategies launched over the last few years has been reasonable in the circumstance, but not yet sufficient to deliver growth. An exception to this is the European mid cap strategies which launched in 2015 and has had strong performance to date. And we continue to hire talent to broaden the range of sector and strategies managed within our flagship European long short fund. By contrast over the last three years, we have been able to build more optionality into our long only business. We have been able to attract great long only talent, for example, Roy Powell, Henry Dixon and laterally, Guillermo Ozes from HSBC and to develop people internally as well, such as Ben Funnel. We also hire a fantastic Northern Italy EM equity team. They are a variety of reasons why managers join GLG, including our investment culture, the autonomy we provide our managers, our infrastructure and competitive economics. The performance of our newer manager has been very good on the long run side, and we are beginning to see inflows into new strategies. Overall, while financial results of our new managers has perhaps not been quite as good as we would have liked, we have done reasonably well. The net effect of the new business activity over the last three years has been that the teams have broken even and we have substantial optionality to generate organic asset growth over the next few years, in particular in European equities and in emerging market debt and equity. Let's talk about fund of fund business and FRM. Since 02/2008, the fund of hedge fund industry, in particular outside The U. S. Has come under a significant amount of stress as a result of poor investment performance across the board during the financial crisis. Our fund of fund hedge fund business comprising originally of IMS, MGS and Glenwood, this is a walk in the memory park, all suffer as much as any participant or more over this period. Since that point, we have been dealing with a rapid outflow from a legacy fund of fund business, which have now all that come to an end. In response to this circumstance, we have stabilized the business through the consolidation of a number of firms in this space, providing the scale and breadth to offer institutional and wealth clients the product they need. In 2012, we acquired FRM, which injected new life into our business and brought an important new relationship with SyngentaMon Mitsui and since then have acquired Pine Grove and BAML FaunaFan businesses, each adding product capabilities and distribution. As a result, the FIM business is of a viable level of scale and profitability and has given us a foundation from which to build our managed account business, which in turn has enabled us to build important new client relationship, particularly in North America where last year we secured mandates from two large state pension plans. Furthermore, FIM has fostered the development of alternative data product, which we have begun to market to clients. Crucially, our managed accounts and alternative beta products have been developed over a long period as part of our investment strategy in front of hedge fund. As such, they have been developed with the needs of hedge fund investors in mind and strongly differentiate our offering for more distribution focused competitors. Let's now look at our distribution. We have very substantially restructure our sales capability as a result of the changing nature of our business, which dramatically cut back our activities in the retail space that historically had focused on the structural product business. We have retained a low cost retail footprint in this region should demand return. We designed and implemented a new self commission scheme, which provided much better alignment with the shareholder and better suited and open ended product base. We also upgraded the sales team to internal promotion and external highs in a number of geographies and channel. The impact of these changes has been a steady improvement in sales volume. In 2015, we generated $22,900,000,000 of gross sales compared to $12,800,000,000 in 2012. Over the last three years, we have generated positive net flows in eight quarters out of 12 and in two years out of three. We have plenty of work to do. However, particularly in The U. S, of which more in a moment. We'll continue to benefit from the trend whereby large institution are putting more money to work with fewer provider. As a result, we have seen many large mandates over the last three years and last year in particular as John described. We continue to try to build broad relationship with our clients and I have 74% of our assets from clients with more than one product. Let's now look at the growth of our North American business, which has been a key strategic focus over the last three years. Over this period, both organically and by acquisition, the North American business has become a significant contributor to the group. Three years ago, the North American business would have comprised less than 10% of the overall group. Today, the North American business manager around a third of our assets and approximately 25% of our AUM is run for clients domicile in North America. Gross sales in 2015 were $5,000,000,000 more than the total raise in the previous three years. I do not think we will ever be entirely happy with our business in The U. S. Given the scale of the opportunity, but we certainly have made progress over the past few years. I myself have been spending most of my time in The US this year and we'll continue to do so as it represents such a key area of focus for us. Finally, let's look at what we have achieved from an efficiency and capital management perspective and the flexibility that has provided us to make acquisition. The decline of our structured product business from 02/2009, driven both by sustained low interest rate and poor underlying fund returns had very fundamentally changed the economic of the firm. The structural product business has nearly run off and we do not expect it to return for some time. And even if then, it is unlikely to be conducted on such attractive terms. Furthermore, we sustained margin deterioration in many areas of our current business, generally as a result of the mix shift from retail to institutional business, but also as a result of margin erosion in high capacity quant product, the economic of our business have changed, scale and efficiency are therefore crucial. According, from 2012, we have been very focused on the delivery of our cost saving program through which we roughly have the fixed cost base of the business on a like for like basis. We are now comfortable that we are running the business as efficiently as we should be for the set of opportunities that we are pursuing. Of course, if the environment and business condition change on a sustained basis, we will adapt accordingly. From a balance sheet perspective, we have also restructured significantly, reducing our overall capital requirement by moving from full scope to limited license, selling assets and buying back both debt and equity. Our balance sheet is strong and liquid and our decision to return surplus capital this year rather than execute a share buyback is driven by a design to have a solid and flexible financial position in these uncertain times. We also renegotiated our revolving credit facility with $1,000,000,000 line available to us until 2020. With this context, acquisition are an important value driver. We have made a number of acquisition over the last three years, which have generally gone very well. While they might underperform, deals have been structured to mitigate the effect. We are well positioned as a consolidator within the asset management industry and have a proven ability to integrate business quickly and efficiently, both from an operational and cultural perspective. We are particularly happy that the deals have worked well culturally and that several members of the management team of the businesses have acquired and we have acquired have taken broader roles within the group after the transaction. That said, we have tried to maintain a discipline on structuring and pricing acquisition. In the last twelve months, we have reviewed a large number of acquisition opportunities, but we're unable to conclude any on such satisfactory returns. We are hopeful that the M and A environment this year will be more conclusive. So, and the pipeline of deals is somewhat stronger today than it has been for some time. Let me just finish with our outlook for 2016. As we have seen during January and February, the overall operating environment continues to be very volatile. Flows are better in places as we saw in the last quarter, but investor appetite remain fragile. Our strategies have held up reasonably well given the backdrop. However, we remain cautious in our outlook for 2016, given the heightened uncertainty in the markets. Our key area of focus for 2016 will be continuing to work on The US as a region for growth, both from the distribution and acquisition perspective, hiring additional high caliber talent at GLG and building both new and existing relationship with key institutions to grow assets. In addition to this as ever, if we are able to deliver superior risk adjusted returns for our clients, we will be able to grow assets steadily by leveraging our distribution. Doing so will further enable us to continue to attract the best investment talent through hiring and acquisition. As we continue to manage our business and balance sheet efficiently, we can in turn provide attractive returns for our shareholders. With that, let's move to Q and A in this room and also on the phone. Thank you. Thanks very much. That was very clear. I wondered if you could say a little bit more about acquisitions, given that you must by forgoing buybacks, you must have a reasonable level of confidence in deal doing ability. Is it simply because you see so many deals and pricing has got a bit better that you feel things must be doable? Or is there anything more tangible than that? Thank you. Look, we looked at a large number of opportunities last year. We probably met with about 160 managers in the course of last year across public and private markets. And the environment for deals was probably the most difficult that we've seen in terms of price expectations of sellers. We think with what's happened to public market valuations in the asset management space in the first six or seven weeks of this year, that, that should have a knock on impact through the course of this year on the M and A side, which there's a natural lag from public to private markets, A, because deals just take time to beat because there is just a bit of a lag. But it's not that long ago, I'm talking about a few weeks ago that there was some quite aggressive deal activity announced in The U. S. At pretty high multiples with very high upfront cash components. So the I wouldn't say that the cycle has categorically turned just yet. That's all said, we think we've seen more situations come up in recent weeks and months than certainly had been the case a year ago. And so things look a little bit more optimistic now. But it's still very difficult to get these deals done and even more difficult to get them done in terms that make sense to us. I wouldn't want to overstate the level of confidence that we have that we will be able to do deals this year and we'll continue to hunt around for the right situations on the right terms. And I think, Philip, I think one of the things we said repeatedly is the last thing we're to do is a deal where one plus one equals two. So we need to find a good reason why this is good for shareholders and that either we are going to distribute significant assets for people like Numeric or there is significant cost synergies or both. And we're incredibly focused on this. And I think we are doing the hardest to try to find the right place to put our capital to work. If I can just continue a bit on the M and A. What sort of opportunities might you be looking at? Is it mostly in The U. S? Are you looking across alternatives and long release? Secondly, I was wondering about the cost base, I mean, the hedging policy you have there. Could you give us a bit more detail as to how your hedging looks over the next two years? And finally, could you give us an update in terms of capacity at Alpha and Dimension sorry, Dimension and Evolution? Thanks. Okay. So I'll take one and three very quickly. I think to answer three in the current state of affair, have about $500,000,000 of capacity in Dimension and in Evolution, we have none, the fund is closed. So that obviously may change depending on new markets, depending on liquidity, this may move up and down and we do what's right for the investor in the fund. In terms of acquisition, I would say that I would not rule anything, but it is likely to be in The U. S. Given the scale of opportunity and given the quality of best of breed manager that we can find. It is almost very unlikely to be on the continent for example. So I think that we will look hard and we'll try to find the right candidate. And on the hedging, we hedge each quarter one year in advance. So we've done the first quarter hedge for next year at the beginning of this quarter, which was at $1.48 per pound. And then we'll just head at the beginning of each quarter one year forward. Morning. Tania Gane from Barclays. A couple for me. A question on the net management fee margin trends. In one of the slides, you indicated on the alternative coupon side, the blended on new sales is 127 basis points. Is that kind of where you see over the next sort of few years that 145 average trending? And connected to that, you mentioned the institutional proportion, quite a lot that's been sold at 100. How sort of stable is that? Could you see that component trending any lower? Second question, you mentioned, as I understand it, on the variable compensation that the GLG equity long short had good performance in 2015, but such as the performance on twenty fourteen days that they were paid performance fee away to the managers, but it didn't contribute much to performance fee revenues given where the funds stand relative to high watermarks as we are in 2016. Are you confident that, that is unlikely to recur in 2016? Thank you. So on the first point, I think the margin guidance within AHL remains the same, which is for capacity constrained products like Evolution where we've sold those all at two and twenty, that margin picture is sustained to be The traders get paid on the basis of the gross P and L that they generate. So if you have a trader trading at $100,000,000 book and they make 10%, that's a $10,000,000 profit and they will get paid a proportion of that profit. So you had 7% on the way back up to high watermark on about $4,000,000,000 of assets is $280,000,000 of gains, and we're paying out very roughly 10% of that. So that's the reason for the $28,000,000 or more or less higher than expected compensation charge. That is a feature of the compensation structure of GLG that I think we've been quite clear on in the past, the unsatisfactory outcomes for the shareholder that can accrue from that model on the performance fee side. It should be said as a counterbalance to that, but on the management fee side, there is no incremental cost associated with incremental management fees. So that's why we have this model on the management fee side. If you raise $1,000,000,000 at 2%, you should have more or less $20,000,000 drop to the bottom line. However, on the performance fee side, it does have this very unsatisfactory feature from a shareholder's perspective. Looking forward, we would again urge you to think about this feature. So if we have, say, a flat year this year in ELS and you have roughly 32 books being run within that fund, inevitably, there will be some netting risk that we bear. So some will be up, some will be down. Now from the outside, it's very difficult to actually assess what's going on because you don't see the books on a day to day basis, but it's always a possibility. It's Hayley Tan from Citi. I'm afraid another question on M and A, just to clarify something. Should we be thinking about this in terms of big transactions or infill? We can see you've got $480,000,000 of surplus and $1,000,000,000 of revolving facility. And then in relation to that as well, obviously, you have kept open the opportunity of doing buybacks in the future. What kind of timescale should we be considering in terms of that? How long should we wait before you come back to that? So I think on the scale, I think I want to reserve I think we want to reserve the right to be highly flexible. And I think the operating rule is to do what makes sense for our investors and make sure this is something where we can stand in front of this room and feel good about what was done. And I wouldn't want to speculate on the size of the transaction, because we just don't know, depending on the opportunity. But I think we're trying hard to do something at the end of the day, which makes a difference to the bottom line. Does that answer the question? No? Perfect. In terms of the timing before you think about share buyback again? Very difficult again to predict. So I think we'll keep it under review as we say an update with earnings as we go. It's not that hard to kind of figure out how we think about it, right? Everything we look at, we have a burden of proof to our Board to basically say do we buy, do we buy back shares, do we pay special dividend every single time. Okay, we will never do an acquisition where it is better for us to buy back shares. Okay, it's better to buy back shares, buy back shares. Okay, we are super, super disciplined. I want to be very clear about this. Thank you. I'm sorry, two very quick follow-up questions. Said that now I'm putting myself up. No, no, on other things. With AHL, it's the number one bullet point in your twenty sixteen objectives on distribution is to market AHL's strategies, given their strong three year performance, given what you said to Ana about the capacity in Dimension. Should we think about this with which strategies should we think about that? And then the second question, just on the GLG ELS compensation. Can you just confirm that is normal competitive practice in the industry and we shouldn't expect any change? Yes. Take the second one. I'll take Okay. So I mean, on ELS, the other point I would make is that there's a scale of payout in the industry, which are generally much higher than where we are. So we've there are many, many good reasons why people want to work at GOG. There are many cultural reasons, the way they run money, the freedom and flexibility they're given. And as a result, our payouts aren't as high as other people's, and we feel like we're at the most economic place we can be. So I think on AHL, have a lot we have different things we can do. So the main AHL alpha and AHL diversified have a lot of capacity. And obviously, we think we will raise money in those. And this is what we're spending a lot of time. And I think one of the interesting things we're spending time on is how to customize mandates, where we go to very large institution and offer a blend of various products. And so some trend following, some numeric some equity quant on the long run side and essentially give the opportunity to the client to decide how to allocate between the various buckets. And I think this is a new trend we're seeing in The U. S. And it's actually quite exciting. And so once again, think of the quant business as one unit. We've tried very hard to diversify the business that we're confront following and build a suite of products where we can go from a holistic standpoint and say, this is the type of portfolio of quantities we can put together and build them for you. And some things at some point in time won't be attractive, like we have a teleprotect product, which essentially gets your loan volatility, while last year it wasn't great, this year it looks better. And you can mix and match the various products and design a portfolio to suit a profile of liability and a profile of risk preference. And when you put this in conjunction with what we're doing with alternative beta, it is quite an exciting opportunity and it's a matter of whether we will get our fair share of the wallet size in terms of growing the business and the proof will be happening. Thanks. Good morning. It's Tom Mills from Credit Suisse. I think that EBA put out a paper in back in December, an advisory paper saying that they thought bonus caps should apply to asset managers of having sort of they look like it wouldn't be the case earlier. Do you have a view on how that might emerge? I'll make the point that over the last three or four years, there have been various compensation schemes muted. The impact of those to date has been minimal on our business. There's been a fair amount of compliance work that had to go around it, but nothing that's fundamentally altered the way that we compensate people. And certainly nothing that's put us at a competitive disadvantage. It's extremely difficult to predict where any of this stuff ends up, but so far so good. Good morning. Thank you. It's Chris Tanner from Goldman Sachs. Two questions, if I may. The first is, I think I spotted a number saying now three quarters of your AUM is institutional, I guess, mirroring a trend, a shift in the industry more broadly. Is there anything you think you can do or the industry can do to reawaken retail investor interest in these products? Any particular products they might be interested in? Number one. And then number two, I think I heard you say, Manny, that you'd hired some people to do EM equities, long only, some EM debt products and some other areas. Is that something you're doing because the M and A prices have been expensive and therefore you might do less of if you do more M and A or is it independent of what happens on the M and A side? I think there's two things. Every morning we wake up and we say, how can we hire the best people and grow the company organically. And that has to be what drives the business because it is the cheapest thing to do. And yes, there is some risk and it takes some time to get to scale. But when we hired Guillermo, he was managing a very, very significant amount of money at HSBC. And, you know, we sort of think about it and say what's the wallet size, what can we do, how do we attract the clients and does it make sense, do we like the asset class, do we think you can make money in EM debt and the answer is yes, yes, yes and yes. Now there is some risk, but, you know, we sort of understand the parameters and we incredibly focus on making sure he succeed and the exact same thing with Rory, the exact same thing with the equity team, the exact same thing with Henry Dixon. In terms of where that leads us, we look at acquisition and we say there are certain things where it's going to be hard to get to scale because we just don't do that. And in this situation and providing that it makes sense from an acquisition standpoint and from a shareholder value standpoint, we will look at them and if the process is right, we're going to do that. Do the things that we just couldn't do by hiring people. Let me take an absolutely random example and please do not read anything into what I'm saying, but let's say we wanted to build a mezz business, a mezz loan business. In this day and age, it is very hard to hire two people who have invested into mezz from Goldman Sachs and taking Goldman Sachs, Goldman Sachs as a mezz fund and the question comes from Goldman Sachs and try to raise a MES fund with two ex Goldman Sachs people. It's just they are people who have existing business who are doing well, who are raising money, this just doesn't work anymore. So you need to buy businesses. In terms of retail, there's nothing wrong about retail. It is very attractive. My friend, Nicolas, is here today spends plenty of time in Japan to try to revigorate the Japanese retail business. We're spending a lot of time in Australia in retail. AHL retail is quite an attractive business. There's a whole effort right now to focus on retail. The only problem is it's like animal spirit. It's a little bit hard to predict when people are excited or not. You look at the actual performance, they're quite good there to date. It feels a hell of a lot better to be invested in the actual than it feels to be invested into most other asset class. Does it mean that return will come back? Who knows? Who knows? In a rational world, they should. Whether they will, I really don't know. But we'll spend a lot of time collectively as a management group to try to make sure it happens because it's not lost unless the margins are very good. Hi, good morning. It's Peter Lovatos from RBC. A few questions, please. First of all, Jonathan, you said there's been no change in your regulatory capital requirements to date. I was just curious if you were expecting such a change? The second question would be on net flows. They accelerated throughout 2015. Has that been a complete reversal so far in 2016 based on market conditions? And the third would be for you, Manny. You indicated that GLG average weighted performance over the past three years was 3.1%. Is that GLG alternatives only or including look great? On the Red Hat side, I think the FCA is pretty backed up in terms of what they're going through. And so we've just been told no change and that you know as much as we do at this point. On the net flows acceleration, we have made this point continually about the lumpiness of our business. I wouldn't read anything particularly into the H1, H2 split in terms of momentum or otherwise. And it will shock you to know I won't make any comments on 2016. And then Manny answer your question on geology. I think also, I mean, you weren't there and you were still on vacation, the January, when the market in China dropped 7% for no reason, that's very good. We were shocked. I mean, a way there's unpredictability about what happened in January, which took us all by surprise. And I think everyone in this room can agree on one thing is that the totality of what happened in the first four weeks in January was just absolutely crazy. And so part of our comment is also tainted by what we saw as pretty extraordinary markets, right. And if you look, I mean, I can name you the five stocks which are the worst performer in the S and P 500. You won't be surprised they're all done more than 50% year to date and they're all in oil and gas. So the pain out there is pretty high in some of the sectors. Hi, good morning. It's Gejerik Khambat, JPMorgan. Just in terms of Brexit, do you see, firstly, what sort of operational challenges do you see for the group? And is there any sort of contingency plans you are sort of looking at? No particular contingency plans. We have about $13,000,000,000 of funds domiciled in the EU, about $8 of which is in $8.5 of which is in Ireland and the balance in Luxembourg. Whether or not Brexit happens, we'll still have those funds. Paul McGinniss from Capital. Just to return to that ELS variable compensation point. If I've understood the maths correctly, would kind of end up in a slightly perverse situation whereby shareholders would have been better off had the performance been worse in those funds. Is there any appetite within either yourselves? Industry to actually address the remuneration structure. On the alternative and on the non organic side and on the corn side is very, very important. And we see this as one of the benefit of being a large alternative players. And it's very, very important. And when you think of creating value for shareholders, I guess, on the line, that's in our view really, really key in terms of driving your business forward. Anyone else on the phone, anything else? We're going to stick around if anyone has any other question, please feel free to come. Thank you for coming.