Welcome to the presentation of Ninety One's results for the 2023 financial year. Thank you to our clients, shareholders, regulators, and the people of Ninety One for your support and commitment over the last year. This was not an easy year. I will start with a business review and including a summary of the results. Kim, our Finance Director, will present the financial review. I will cover growth opportunities and provide an outlook for the business before taking questions. You may also submit questions during the presentation via the chat function on your screen. Please do state your name and your organization when submitting those questions. Here are the key messages. This was a solid financial performance supported by cost discipline.
Globally, we faced headwinds from interest rates rising at the fastest pace in 40 years, compounded by geopolitical upheaval. The result was obviously a risk of environment. In the U.K., we experienced indiscriminate sell-off of risk assets because of the stress in the LDI market. In the final quarter, to top it all, we saw a range of bank failures in the U.S. For Ninety One, this has been in a period of extensive client engagement. While risk aversion among asset owners over the reporting period muted demand, the quality of engagement gives me confidence for the future. Our real long-term value driver is investment performance, and we have delivered on this front. Our strategy has remained consistent and aligns with the long-term structural opportunities we see in the market today.
Our people are committed and motivated, and our collective ownership continues to increase. We're in the business of long-term value creation through successful investment and enduring client relations. As usual, I remind you of our long-term track record. Over time, we've shown the ability to invest successfully, meet client demands and needs, and gather assets and grow revenues. Ninety One is a resilient business with a relevant product offering for the future. It is also important to remind you of the business model. Firstly, we're a specialist active investment manager. We are capital light and cash generative. We are not capital-centric, but people-centric. Ours is an organic, client-focused, results-driven business. In today's world, we must also be technology-enabled. Over the last year, we felt the need to explicitly include this in our business model description because tech is evolving faster than ever before.
The potential for efficiencies in our business is enormous. This does not imply overambitious tech budgets. We simply intend, in the most disciplined and coordinated way, to apply the most relevant and available tools. Ninety One is clearly differentiated from its competitors. Ours is a business that has grown organically from an emerging market into the mainstream of global investment management. We draw confidence from our 32-year history, which is one of resilience, originality, and growth, fueled by an owner culture. We're proud of our emerging market heritage, which represents not only our past but also the world's future. Finally, we believe we have superior client reach when compared to other mid-sized active specialist managers due to sustained investment in our regional client group presence. We are a purpose-led organization. You know that.
By being a better firm, investing better, and building a better world, we can deliver on our purpose of investing for a better tomorrow. Let's go to the numbers. Our assets under management stood at GBP 129.3 billion on 31 March 2023, representing a 10% decline from the prior year. Average assets under management during the financial year was GBP 134.9 billion, representing a 3% decline on the prior year. Net outflows accelerated in the second half of the financial year, resulting in a full year number of GBP 10.6 billion. We are disappointed by this outcome. We believe the acceleration in the final quarter was client specific and driven by risk aversion due to the volatility of the preceding period. This was not caused by client unhappiness but by market conditions.
Investment performance was better than the year before, with an improving trend. One year firm-wide outperformance stood at 57%. Three year firm-wide outperformance stood at 71%. Adjusted operating profit fell by 10% to GBP 206.7 million. At the same time, by controlling our cost, we managed to post an adjusted operating profit margin of 32.7%. Basic earnings per share were lower by 19%. A large part of this decline reflects the profit from the sale of Silica and the share scheme net credit in the prior year. Kim will cover the financial results in more detail, but I will just mention the 10% reduction in adjusted earnings per share, which reflects the underlying performance of the business. The market and business conditions were extremely challenging.
The mood was decidedly risk off over the period, with flow takers being money markets, developed market fixed income, alternatives and solutions. These are not areas in which we operate. Putting this result into context, we cannot ignore the dramatic rise in interest rates in response to a sharp rise in the rate of inflation. The causes of the latter are many. The rise in interest rates from historic lows has highlighted vulnerabilities in the system built up in the era of cheap money, which we experienced after the 2008 financial crisis. The LDI squeeze in the U.K. had a direct effect on our flows as clients scrambled for liquidity by selling risk assets, often indiscriminately, to meet margin requirements. The sharp rise in long-term interest rates also created new demand for liability matching, thus shrinking the risk pool further.
The bank failures in the U.S., which started in the final quarter of the year, were the result of business models not being able to cope with rapidly rising interest rates. Disruptive geopolitics, including Russia's war in Ukraine, have further depressed the risk appetite for emerging markets. The regulatory burden has continued to increase. It would be reasonable not to expect a simple extrapolation of these factors into the coming year and years. Although still challenging, we will be dealing with the specific impact of higher interest rates on each of our investee companies or issuers. Bottom-up analysis will really matter. This should be a better market for active managers. We continue to believe in the resilience of our business and the soundness of our business model for the long term.
After a number of years of growing AUM, we suffered a decline in the first half, driven by the GBP 3.2 billion of outflows and a market drawdown of GBP 8.4 billion. In the second half, the net outflow number accelerated while asset prices showed a modest recovery, resulting in a year-end number of GBP 129.3 billion. The second half of the year drove the bulk of the full year outflows. Our client concentration risk is low, with no client representing more than 5% of AUM or 4% of revenues. Nevertheless, three clients drove more than half of the reported net outflows this year. This was driven by their desire for de-risking or reallocating. It is important to highlight that they still remain clients. We have also seen substantial currency and market movements.
Had we shown this picture in U.S. dollars for the last year, you would have seen assets under management up by more than $20 billion in the second half, and closing higher than at half- year end. Clearly, we don't report in dollars, unlike many of our peers. This is just to highlight the foreign exchange impact on our business. We are working hard to reverse the accelerating outflow trend recorded here and indeed, turn that into inflows. Much of this was driven by equities. Part of that was LDI, part was tactical client reallocation, and part related to the demand decline for U.K. equities, which is structural. This overwhelmed the inflows during the year in Global Quality, sustainable and natural resources equity strategies.
Emerging market fixed income was recorded as a risk asset, and net outflows were driven largely from sovereign strategies. As with the prior year, net inflows in our South African platform business were positive. We maintained positive inflows in South Africa during the first half. At the end of the financial year, all our client groups were negative. In summary, Asia Pacific net outflows were driven by a small number of one-offs as a result of client reallocations. It was a similar story for Europe and the Americas client group. There were reductions in risk exposure, but not client terminations.
U.K. net outflow were largely, outflows were largely as a result of the fallout in LDI-related sell-off of risk assets to meet margin calls and further, the further de-risking of defined benefit plans. In the Africa client group, fund platform inflows were offset by larger net outflows in fixed income strategies. These outflows I've described were mostly in the institutional market. Institutional clients made big calls during the year. All were tapping into their liquid investments for cash, considering their high exposures to less liquid asset classes such as real estate, private equity and private credit. The advisor market has been far more stable. These clients tend to hold during periods of volatility. Performance remains solid and competitive in the long term. Investment performance improved in the year.
This leaves us pretty well positioned for new business when markets turn. During the year, we have also strengthened our CIO office and the technology and quantitative resources at disposal of our investment teams. There was a turnaround in mutual fund investment performance. This trend is worth mentioning. At Ninety One, our mantra in this space is sustainability with substance. We have been advocating for an inclusive and fair transition. At the IMF and World Bank Spring Meetings this year in Washington, there was a change in tone. There is now significant momentum behind the concept of transition finance. We are working to develop frameworks to support decarbonization. We are supporting heavy emitting companies to transition. We are expanding our range of sustainable strategies in anticipation of structural demand growth.
Ultimately, we also have to implement our own transition plan and focus on how we run our business and our Scope 1, 2, and 3 emissions. We don't just expect portfolio companies to do this. We have to do it ourselves. Here we remind you of our transition plan targets and our progress. This is a process and not an event, and we are making progress. More of our investee companies and are developing Science-Based transition pathways by 2030. There is a continued reduction in our Scope 1, 2, and 3 emissions. Two new sustainability strategies have been launched in the last 15 on-months, with more in the pipeline. Finally, there is continued engagement with multiple stakeholders on a fair and an inclusive transition.
We are on track to meet our targets of 50% of financed emissions with SBTi-aligned transition pathways, a 46% reduction in Scope 1, 2, and 3, Category B of Scope 3 reported emissions by 2030, while remaining active advocates for better disclosure and more ambitious climate finance solutions. Most important is the culture and of course, the mindset of our people. This is a people business. We have committed and motivated staff who have worked very hard over the last year. We have been disciplined in headcount management. Our clients, however, expect more for the same fee, which maintains upward pressure on headcount numbers. We showed this year that our variable costs are truly variable. Kim will share the numbers later. We are deliberately building an intergenerational business and continue to support our people through these challenging times.
Finally, we have further increased our staff ownership, which is now 28% and aligns with the interests of our staff and shareholders. I will now hand over to Kim to take you through the financial review and I will then cover our growth opportunities and outlook at the end. Kim?
Thank you, Hendrik, and good morning to you all. After a challenging year, I am pleased to present robust financial results for the year ending March 31st, 2023. The highlights are as follows: Adjusted operating revenue decreased by 5% to GBP 633 million. Adjusted operating expenses decreased by 2% to GBP 426.1 million. This resulted in an adjusted operating profit of GBP 206.9 million, a decrease of 10%. I will go into more detail on these figures over the next few slides. Considering adjusted net interest income for the share scheme, net expense or credit last year, and one-off gain on the disposal of Silica in FY 2022, Ninety One profit before tax decreased by 20% to GBP 212.6 million.
The effective tax rate for the period was 23%, largely down from the prior year of 23.1%. The above factors resulted in profit after tax decreasing by 20% to GBP 163.8 million. Some points to bring to your attention. The interest expense on our lease liabilities for our office premises of GBP 3.6 million for FY 2023 is reported in adjusted operating expenses. The share scheme net credit of the prior year has reversed our share scheme net expense. This is owing to our lower variable remuneration and resulting decrease in deferred bonuses being awarded as shares in the current year. The adjusted operating profit margin decreased from 34.7% to 32.7%. Our adjusted EPS shows a 10% decline in line with the fall in adjusted operating profit.
This slide provides further details on the adjusted operating revenue, which decreased to GBP 633 million. Management fees decreased by 4% to GBP 607.7 million, this was predominantly driven by the decrease in average AUM from GBP 138.6 billion to GBP 134.9 billion. A 3% decrease. The average AUM decline results in the fall in management fees, along with a decline in the average fee rate to 45 basis points from 45.7 basis points. This rate was 45.2 basis points at the mid-year, reflecting a slower decline rate. Again, this was due to a change in the mix of strategies owned by our clients.
We do continue to have pressure on fees and with the client mix changing, we'll guide cautiously to this being marginally down in the year ahead. Performance fees continue to decrease from the high levels seen in FY 2021 and FY 2022, although still a positive contribution at GBP 19.4 million. This was largely due to outperformance in relative benchmark investment strategies in the current period. Again, we do not foresee this materially changing in the year ahead. Shares on profits from associates was up on the prior year and was a small contributor to adjusted operating revenues. As was the addition of other income of GBP 4.5 million. This is a mixture of FX gains on earnings recognition and operating interest. The next slide shows the buildup of adjusted operating expenses year on year.
I'll spend a bit of time actually on this slide. At the half-year, we were conscious of the pickup in operating expenses, and this was mentioned in November. We reviewed costs to see where reductions could be made. Starting with remuneration, which fell by GBP 18.9 million or 6%. Now is at 65% of our cost base. We show fixed remuneration increasing by GBP 11.2 million, which is of which just under half is linked to inflation-based increases. The balance reflects a continual investment in our teams, including headcount growing on an average of 2%. Importantly, variable remuneration fell in line with the decline in operating profit by GBP 30.1 million.
We've always been clear, both internally and externally, and there's now evidence here that this is variable and will flex alongside the results of the business. Variable remuneration remains at over 50% of employee remuneration, and this results in compensation ratio declined to 43.5%. Looking at business expenses. These increased by GBP 11.5 million or 8%. This is higher than what we wanted, but lower than where we were at the half-year, where business costs had increased by 13%. All our costs have increased except for promotional. We've analyzed this at, and at a high level, been able to break this increase down as follows. Inflation-linked impact of GBP 5.8 million for those costs that are actually impacted by inflation. FX-linked impact of $3.5 million, which is mainly the USD-based expenses.
One-off cost in the year of GBP 3.5 million. Travel costs normalizing post the COVID impact of GBP 3.1 million. We're finally showing what we would regard as cost management or reductions of GBP 4.4 million. The year-on-year split of these expenses remained relatively unchanged from last year, other than travel, which obviously increased, and promotion which decreased. The largest expense here remains the client and retail fund administration. Looking ahead, we're expecting the business expenses to increase with inflationary pressure, noting there's nothing material planned in the year ahead. This slide is showing the business expenses and total expenses as a % of average AUM and basis points over a seven-year period. Covering the period both pre and post the listing in March 2020.
The single message here is the consistency of total expenses as basis points of AUM as the business has grown and developed. We've attempted to maintain cost base discipline and achieve some operating leverage, but this has been challenged, as indicated on the previous slide. While fixing the variable remuneration, total expenses have been marginally increased relative to AUM, but importantly shown the downward trend from the high seen back in 2017. The business expenses basis points of average AUM have returned to levels last seen around 2020 as a result of the impact of inflation and FX on the GBP cost base. To summarize here, this is analysis of the absolute movement in the adjusted operating profit from FY 2022 to FY 20 2023. The adjusted operating profit for FY 2022 was GBP 230.4 million.
Management fees have decreased by GBP 25.1 million. Performance fees have decreased by GBP 11.7 million. Other income items such as FX gains and operating interest increased by GBP 5.9 million. Notably, employee remuneration decreased by GBP 18.9 million. As discussed earlier, business expenses increased by GBP 11.5 million, resulting in adjusted operating profit of the GBP 206.9 million for FY 2023. My final slide summarizes the Ninety One capital position at the end of the financial year. Ninety One's qualifying capital was GBP 314.6 million at the end of the financial year.
In line with our dividend policy, the board has recommended a final dividend of 7p, taking the full year dividend to 13.2p per share, a decline of 10% in line with the fall in adjusted EPS. After this dividend payment, there'll be an estimated capital surplus of GBP 137.2 million, and this will result in the capital coverage of 219%, slightly up on the prior year and in line with the conservative view of capital retention while paying out less than 100% of after-tax profits. This remains above the 200% coverage we have been targeting. In line with the current market environment, we are comfortable to hold this position.
Any intention to extend our dividend payout ratio in the future years will be discussed further with the board. In line with these proposals and the capital buffer, we remain committed as ever to a capital light model. Furthermore, at this time there's no plans to increase the number of shares in issue, nor to encumber the balance sheet with any debt. Thank you. I'll now pass back to Hendrik.
Thank you. Before I move on to the growth opportunities and outlook, let me just remind you to submit questions via the chat function on your screen. Please do state your name and your organization when submitting these questions. Despite the current climate, we see substantial long-term growth opportunities in global and international equities, emerging market equities, emerging market fixed income, specialist credit, and sustainability related strategies. Taking those, let's work out how they can drive growth. Emerging market equities have been underperforming for some time now, trust me, that will change at some point. Emerging market credit is an underappreciated but growing asset class. Sorry. Of course, emerging market credit has actually been an excellent performer, which hasn't been noticed. Sustainability and impact investing will keep growing.
This is structural and will be with us for the long term. As part of our ongoing assessment of opportunities, we have actually done detailed work on the addressable market. Our real opportunity easily exceeds 15% of the total global market for professionally managed assets, which has been estimated by McKinsey to be approximately $120 trillion. For the purpose of proof, we have identified specific categories where we are already active to show you that we have real plans and not just dreams to grow. We conservatively estimate an immediately addressable market of approximately GBP 7 trillion for the investment competencies summarized on the previous slide. These have been developed organically in our business over many years. We have a varied market share across these, ranging from insignificant to just over 2.5%.
There is much scope to grow. In all these areas, we have credible track records and recognized market positions. In summary, if we stay focused, articulate our differentiation well, and deliver competitive long-term performance, we can create substantial growth. As an example, our Global Franchise strategy has been ranked 3rd in terms of attracting net flows in the global large cap equity universe. That's from investment. Over the last few years with, we have shown that you can grow in certain categories when the opportunity is there. With the right application, track record, and time in the market, we can develop several scalable global leadership positions in large categories. This can add substantially to shareholder value in years to come. We've had a single-digit number of strategy launches and closures in recent years, showing a careful balance between innovation and product discipline.
Even during this year, our newest strategies again delivered positive net inflows. This proves the case for continued innovation. To summarize, this has been a tough year. Market conditions have not been supportive. However, we have a relevant skill set for the long term. We are competitive and our investment performance is solid. We have deep client relationships and superior client reach, given our scale. Our team is motivated and committed. Our foundations are solid. Our multi-decade track record as well as our culture, team spirit, and will to win, give us confidence for the future. Looking ahead in the current financial year, we've seen a stabilization of conditions. We have not yet witnessed a decisive change in risk appetite among clients. Although, we've seen signs of that among certain asset owners. Our working assumption is for market conditions to remain challenging.
We will focus on execution and avoid distractions. We are confident in our ability to deliver in the long term and give our shareholders the results they deserve. Let me end with a quote from Marcus Aurelius: "You have the power over your mind, not outside events. Realize this, and you will find strength." Thank you for listening. Now we're open for questions. Lots of hands. Kim, let's go stand here. Where are our pens? Make sure we can take notes. We're starting with Hubert in front.
Hi, good morning.
Hubert, there's three questions. I think three.
Yeah, three. It's
I'm writing it down this time.
It's Hubert Lam from Bank of America. Three questions. Firstly, I thought the slide was interesting around the growth opportunities that you said. It seems like that you think you have the capabilities today to still grow in these areas. How do you kind of compare that? How do you compare that to trying to diversify into other areas, especially considering you had outflows over the last six months. How do you think about staying the course and diversification? That's the first question. A second question is also on flows. How do you see flows over the next, I guess, six to 12 months?
Mm-hmm.
Do you think the worst is over, considering, you know, you had some one-off impacts from LDI over the last quarter, concentration around three clients? Would you say that it's gonna get better again compared to last quarters? The third question is for Kim, if you a chance. On the operating margin, it was 32.7%. Considering it was a tough market last year, would you consider that to be the floor that we would expect going forward? Thank you.
Thank you, Hubert. I think your first question is the question. There's this massive depression on active investment management, and we've had at risk on investment management. Why? Because there were no flows or very limited flows, and asset owners have been diversifying heavily into illiquid spaces, right? Liquid assets were the banker. We were the bankers for the rest of the industry, for the private equity market. That is gonna end because you are going to see some accidents as leverage starts to bite, and people realize that you actually have to mark to true market, and people realize that they need liquidity from time to time. There's gonna be a shift. I think that structural shift is starting.
It's not gonna happen this year because the money is tied up and new flows have to be generated and jobs have to be created. I think there's gonna be a rebalancing in the thinking. Our view as a firm is we are not gonna chase the markets that took the flows yesterday and the year, decades before now at great expense. What are we doing? We're staying in the public equities and emerging market debt lane. We're adding sustainability and a widening product a range in sustainability related products and developing our credit platforms because we've got some very well-developed emerging market credit platforms which will go into private as well as public. There's an intersection between sustainability, emerging markets, and infrastructure financing, which is going to be a sweet spot for a long time in the world economy.
We are positioning for that. In our mainstream categories, we believe the bar is getting higher. If you have long track records, you've been around and you perform, you are gonna get the flows because the market has become more discriminatory, and that's what we're going for. The trade-off for a capital light business, you can't be capital light and non-volatile. We are slightly more volatile. If we deliver and if we have the human potential and technology to deliver and win, the gains are substantial. I would say there's a huge amount of option value in our strategy. If we don't execute well enough, we will fail to realize that option value.
What share it takes is, do they think this team with its 30-year track record and its culture and its human component has the ability to capture that. We're staying focused in our lane because we think defocus is actually. Actually we're trying to focus the business more on clear growth opportunities, even though we have other parts in our business which may win money in the near term, such as multi-asset and others. We're not veering into the solutions business or into the winners of the last decade or two because we think you're just gonna be whiplashed if you go there now unless you've got very deep pockets to spend. That's question 1. I think it's a really important question because that identifies and defines us. Now, let me just. I see David McCann looking at me.
Let me just say the difference between us and a small single product boutique. That's another great position to be. Sit there with a single product. Is that we have reach to large asset owners wherever they are. What we're really in the business with is building 100-year relationships with 100 large asset owners and asset platforms.
Mm-hmm.
Over time, making their life easier, not all the time. Sometimes having low allocations from them, sometimes high allocations. That's the strategic essence. On the flow in the coming year, Hubert, you know we never make predictions.
Mm-hmm.
What I can tell you is, I think the one-offs, the sort of extreme... Unless, of course, the U.S. defaults. I can't guarantee. I think no one in the room can even imagine what that will do to the world. Unless that happens, and unless there's a nuclear war, I guess we've reached the stage where extreme behavior and risk adjustment or risk, reshaping of risk in portfolios has happened, and normal allocations will resume, which will be better for us. The experience we've had since the beginning of the year was that of a more stable market. Although, very importantly, clients take longer to make decisions. They postpone them. They've also had, because of the impact of, you know, last year on their financials, there are also some management changes in our clients and asset owners, which slows down decision-making process.
I'm not predicting a back to Goldilocks world in three months. Understand that. I do feel there's a much more stable and sort of sensible allocation process as opposed to a reaction to extreme market events. You know, interest rates went up 10x last year in the U.S. Just think about it. It's enormous.
Mm.
that impact. It's gonna work through, but it's that shock has now been absorbed. I would say, you know, if it's as bad as this year, you know, I'm really gonna look stupid next year, and I'll wanna even show up here. I don't, I really don't know. The indications are that's a more stable, normal market. Kim, you can deal with the last question.
The last question, I mean, obviously operating margin is a factor both the top line and the bottom line. You know we can talk about the top line, which is your flows. You know, holding on the fee rates, which as I've noted, we're not seeing the sort of drop-off as we've seen in the past, which has been a full basis points. From the cost perspective, there's a big chunk of those costs that are still fixed. Yes, we've shown that we can flex to variable . We spoke about last year. We've done it. We've not had any sort of mass exodus walk out. You know, there hasn't been sort of knee-jerk reaction in the business as a result of that.
We basically process that internally very early on, both internally, as I said, we mentioned externally. We will still be challenged from a operating margin point of view with a fixed cost base. You know, if you get hit again with inflationary pressure, you know, we've analyzed that quite closely. We know where those figures are. Again, with the sort of the USD base, we're not seeing any material. We had some one-offs. We had the last of the COVID sort of travel costs coming through, which hit us. Yeah, we don't give a target. We like to try to keep it somewhere between the 30% and the 35%. You know, we're sitting in the middle there at the 32.7%, which is something we were comfortable with.
May I just add something to this? We want to be on the front foot in this negative market. What we're not doing is optimizing to margins and earnings targets.
Mm-hmm.
There are opportunities in the world right now. There is loose talent in a number of organizations. There are regions which are currently producing lots of money.
Mm-hmm.
For us to be, you know, kind of totally conservative and not go for that and build next growth for the next five years would be wrong. We will take bets and we will invest in our business, and we will actually invest as if we own 100% of the business. I know we only own a third and a lot of people own the rest, but we think like people owning 100% of the business. That means from time to time, you actually don't play to the next quarter's dividend. I just yesterday had a long conversation with the board about that, explaining to them this is what they can expect. We will be opportunistic, but only in the areas we have identified as growth opportunities. Not.
You know, you're not gonna see us tomorrow starting a, you know, a sort of a life sciences business out of nothing, which we haven't got any credibility. That you won't see. We can't guarantee a margin.
Mm-hmm.
Who's next? We have these guys. Here and there. David.
Thanks, Hendrik and Kim. Paul Bryant, Equity Development. Two on the sustainable investing opportunity. The transition finance features quite prominently in your opportunity. It seems to be more prominent discussion in South Africa, U.S. as compared to Europe. I'm curious to see if that translates across your clients. Is there a difference in interest across geographies in that space?
I think that's a very astute observation. A very good question, because I've kind of hinted there without talking too much. You know, unlike in banking, when you start a new idea of that, you go to clients, they'll respond quickly. You know, if you're an investment banker, you can get it done, go to corporate to do a deal. In the asset management world, where we have a heavily intermediated channel, consultants, boards of trustees, advisors, it takes long for new categories to take off. We know how successful Brookfield and Macquarie have been on the transition equity side. A lot of that was dealing with existing asset owners who were already in that space as wanting to go.
In the sort of more traditional end of the market, there's been a long conversation, which initially started with decarbonize all portfolios and then pretend the world's gonna be better. Well, we've all now realized. We've actually got to take the businesses we have and make sure they decarbonize. That would need finance, both equity and debt. That is the opportunity we're talking about. That $4 trillion a year, of which one has to go to the emerging markets. Those are massive numbers with returns at the end if you do it, or massive destruction if you don't do it. That's something which you'll hear more about as you go to COP. You'll hear it becoming a normal mainstream discussion. Banks, you'll notice, they talk about big parts of their balance sheet being part of that, but they don't have enough balance sheet.
It's the GBP 120 trillion that I showed you that has to participate. That is the unquantified growth opportunity that we have been pursuing now for the last sort of, I would say five years, without showing much detail. We hope to start showing you some real results. But the education investment has been massive. The meeting, the potential regulatory and market risks of being associated with greenwashing. Those are massive. You've got to be very careful. we've really been digging deep foundations for something I'm quite excited about, but I have no proof points to say it's starting to happen. Sense is transition finance will become a very important part of finance. Ninety One will be a player in that at scale, but you've got to wait. I can't make any promises.
I can't make short-term promises, but what I do know it's going to happen. Question is, who's gonna capture it and how? I think we are positioning our existing skills where they're relevant to contribute to that. That's as much as I can say now, but I think there'll be more news at sort of interim and at the year-end stage. Remember, everything we do is organic. It takes long. We start building these foundations. Global Quality equities that we spoke about, the Global Franchise strategy, which is now, you know, a very substantial flagship strategy. That was 0 1five years ago. 15 to 20 years ago. It's kind of a dream.
These things take a while, but I'm very excited about that opportunity as an addition to the sort of traditional betas on which we add alpha. We don't think those traditional betas are disappearing, as I showed you with the 7 trillion, which I could easily have shown pounds, which is almost $10 trillion, which I could easily have made 20 if I wanted to impress you. We were really focused on what is there now and today to capture. In that 7 trillion, there is 0 for transition finance. Ryan and then David. David, you asked, gave us a bad report card today, but.
That question's never been asked.
No, David, go for it.
Ryan? Ryan?
Ryan hasn't got the speaker. Either to David now.
David's got it. Go, David.
Yeah. Morning, David McCann from Numis. Yeah, just wanted to touch on that, on, you know, the new growth channels that you've articulated the product. You obviously already answered some questions on this. I just wanted to get a sense of what proportion of your existing business are those four areas really represent, just so we can get a sense of, you know, the bits that might grow, what proportion of your existing book is it, and of, you know, the balance, which is obviously the more mature or even declining book. You know, just so we can figure out how those-
I would-
How to balance.
I wouldn't put the balance as a declining book. Very good question. I would say about just over half to 60% is facing and is in those spaces. I would say the other half to 40%, but less than half would be in low growth space. A quarter of the business is in generally lower growth spaces to, you know, and you don't need a genius to work out which they are. Lower growth, a quarter is a version of, but not in the sweet spot where we think it will grow that much. one quarter is good beta that could get positive flow.
Take for example, in areas such as, you know, in our case, we have to compete very hard for multi-asset mandates because we don't do a solutions business. We have a very good multi-asset team. They will win. Winning at the same scale as those growth areas is gonna be a challenge for them. We want them as part of our business because they're a strategic part. They inform us about the entire asset spectrum. They understand how our clients think because they think like our clients and they grow. They're just not in a growth sweet spot like solution, like, you know, the low margin solutions, because we actually take responsibility for the alpha as well.
I think given the dynamics at the moment in the South African economy, we can't expect that pot of money to grow as fast as it used to grow. It's a good part. Our market shares are growing. We have a great business there, and we don't think that business is gonna go into decline, but it's not gonna grow as fast as the areas I've shown you. Then there's always certain styles of products that you do which become less fashionable, even if you don't believe they're less fashionable. Clients might believe, which is why I leave that quarter open for, call it, I wouldn't say run down, but less growth.
What's interesting in this business, some of those older strategies or offerings that may not be in huge demand, I mean, value has not been in demand for 10 years. They may come back. You keep them because they're profitable, they don't cost you anything, but they don't necessarily grow at that point. In a focused asset manager, you have a few things extra. What we try to do at Ninety One is not to have too many of these, because then you have a cluttered proposition, and then you go and talk to a client, and the client doesn't know what you stand for. What we're saying very clearly, we stand for a few areas. That's our opening gambit. That's what clients know us.
If they know us well enough, they may say, "Well, can you do that for us?" We say, "Yes." What we don't do is go the traditional long-only broad waterfront approach. We don't think that is gonna work unless you're a retail or a mutual fund or ETF manager in a large market, which we aren't. We talk to people who any day of the week can pick amongst 20 or 30 suppliers for anything they need, and therefore, they deal with the suppliers they trust and the ones who have done well for them in the past and who are very clearly expert at what they do. That's what Ninety One wants to stand for.
Knowing had we started in the U.S. 30 years ago in a scale market, we would have been known for two or three things, and we would have bothered with the rest. Having started in a small emerging market where we had to deal with the waterfront, we also had to find out and then come to the U.K. when actually just at the point when risk-taking in institutional market was imploding. I mean, interestingly, we arrived here, the market was kind of over. The... We had a broader base to start from. Slowly, slowly, you're narrowing it down. Slowly, slowly, you're becoming known for something, and you distinguish yourself with your long track record. That's the process we've been through.
I think we're pretty clear now. We have a very clear proposition to large clients, which is why the bulk of our assets are in the growth space. There are some parts where growth will inevitably be lower, or fashion would dictate, or custom client demand would dictate that there wouldn't be that much, but we run them profitably. We don't run things at a loss unless we think they are growth prospects. Where do we invest at the moment? Specialist credit sustainability. We're investing heavily. We're investing heavily in the technology, backing up our investment teams to make sure they can be more efficient. We're not investing in sort of quixotic new ideas which may or may not come off.
Thank you for that. Just to follow up to that, on the newer areas, what do the flows look like, let's say, over the last year, perhaps? If you want to exclude any one you also mentioned. Just also thinking, you know, looking forward, what would good look like? Would this be kind of a talk ratio of like 5%, 10% in those areas in isolation? Is that the kind of numbers we should be thinking about?
I think the new areas held up pretty well. All of the new growth areas except for emerging markets, which are clearly marked as a growth area, held up pretty well in this year. Okay. Even in this year, they've been strong except where clients took off largely, you saw now, for largely equity risk at scale. They just took it off. They didn't want it. Those were not either good or bad. They were just the risk was taken off. I would see the sustainability growth. You can go look at Impax's results and that. You know, there's demand. We've got an equity-centric offering, which we're adding debt-centric products to. The equity centrism was a little dampened towards the end but did okay.
The global equity side, I think, particularly around the quality style, there's a big opportunity for us, particularly out of the U.S. We've seen in the last quarter of the financial year, you know, where people have been knocked by so many risks. Came the U.S. banking thing. There was a hold on liquidity and a hold on allocations. I think we'll be able to tell you at half-year whether those allocations are structural. Of course, we're also reinventing some of our existing platforms with good track records to make sure they are client-facing and they're client need-facing. I think the half-year, I can give you a sense.
The newer areas and the areas I've identified have clearly had the better of the client experience, subject to the fact that there was significant equity risk down-weighting and there was significant caution on emerging market fixed income. You've seen Ashmore's results as well. That tells you the same story. Yeah.
Rahim.
There's a question at the front.
Yeah, yeah.
Good morning. Let these guys first do, and then we go. You have five minutes, r ight?
Good morning. It's Rahim Karim from Investec. Two questions, if I may. Henry, you talked about the structural decline in U.K. equities. I'm just wondering if you could perhaps elaborate on that a little bit more on what you might be doing internally to right-size that business, if that's required, or if it's just was more of a relative comment than an absolute one.
We've obviously been reducing some costs there, but also focusing. We've got a very exciting U.K. Income and U.K. Alpha and U.K .Sustain. We just won a prize last night for the best U.K. Sustainable strategy, but we haven't seen flows.
Mm-hmm.
Okay? you know, we are focusing the U.K. equities for the remaining market, but we're making sure we match the opportunity with investment. We think we're gonna be one of the survivors. We don't think that's ultimately drive our firm the full value of the firm. It'll add value, and we're probably close to the bottom. But it's just... As we have the consolidating in wealth managers, they are also building more international portfolios for their client. I think one of the travesties is how U.K. Inc. has actually short sold its own equity market and not kept developing it. I think we all in the room are, in a sense, victims of it because you need equity to finance your own developments. You need new businesses. You need...
You know, you can't keep active vision here as a prisoner. You need to have lots of new active visions developed by an equity market which gives the right kind of valuation. There's enough money behind it. I think that's a challenge for the policymaker. That's above my pay grade. I would say there's still a large pool of money here. For that pool, we're gonna compete in a measured and in a specific sense. What we've done, we for example, had U.K. products across some of our equity platforms. Remember, we are skills-based platforms. We've narrowed it down to one platform and made the others focus on either global or emerging markets because there was more money flowing there. I think we've done that. There's no re-engineering to come.
That's done.
More questions?
On the second question, you talked about the investment in technology. Could you perhaps give us a sense of how much you've been spending on that, and how we should think about the efficiencies coming through? Is that forward to the underlying margin? Is that kind of a forward slight degradation in revenue margins going forward? I mean, how should we measure the success of that technology investment?
It. Firstly, Kim can talk about the spend. We haven't really gone with the checkbook.
Let's talk about spend.
It's more the mindset.
Yeah, I was gonna say, I think you'll measure it in performance. It's not a financial impact. The cost that you see, the system spend you're seeing is really what is where the investment is. There's always a danger when we say technology enabled, investment spend. That shouldn't be translated, I think Hendrik mentioned it earlier, as an increase in what you're actually seeing currently being projected or in the figures that you see right now. I think what we're rather seeing is an internal efficiency and if anything, an improvement of the processes.
I think you can just. If you look today, for example, our investment managers, the screens they have, the dashboards they have.
It's a smart spend.
Does it allow them to operate with fewer analysts than in the past? Yes or no? Does it enhance their visibility of what they do? Remember, our clients have also been... A lot of our spend has been to keep up with our clients. Our clients wanna say, wanna know real time what's going on. When you have an insurance company in Germany with 20,000 people or in the U.S. checking you, and you've got three people this side of the fence or city, you know, you've really gotta then have the systems to be able to deal with them. One thing we can assure you is we have the systems and the pipes to plug these asset owners in and to meet their demands. That excludes a whole lot of boutique land which cannot even start competing with them.
We're there. And that spend is, of course, the AI benefits and there's data, but we are very cautious of going into the sort of promise that do things. It's a marginal efficiency and it's a keeping up with your client. Of course, we've really been focused on the investment front office, where we've created an over the last three years a team internally that develops the systems in a standard way across all our teams, so we don't have all these packages bought where our data cannot be.
It's just smarter spend.
Just cannot be looked at.
Yeah.
Through a, in a comprehensive and aggregate way. Of course, RFP, I mean, you know, the AI revolution is gonna really help with basic RFP, basic marketing stuff, basic compliance checking and all that. That's coming, but that's not gonna put us at an advantage to anyone else. We'll just be there with the good people. We actually have a session after this with our staff about explaining it and what we can do. It's not a big spend. I mean, Kim, it's a few million extra. It's not-
I mean, well, it's basically it. The point I'm trying to make here, there's not a pickup in expense when you're doing your model going forward. It's an efficiency.
We are looking at the outside. Piers, you guys are the two outside. Go for it.
No, it's cool.
Pierce Brown from HSBC. Maybe one for Kim and one for you, Hendrik. On the question for Kim, just on cost again. Sorry to keep sort of banging on about cost because I know you know, I'm sort of on board with you. You can't shrink the glory. Given the margin, you mentioned the GBP 4.4 million of cost management saving-
Mm-hmm.
Last year. I mean, is?
4.4.
Not as, not as heroic.
4.4.
Yeah. GBP 4.4.
Well, it's costing, yeah, as we look at it. Yeah.
Just if you could sort of describe the process there. Is that just an ongoing process of looking for optimization in the fixed cost space? Is there anything you're looking at specifically in the pipeline for this year, which you might pull the trigger on?
It's the ongoing. No, there's nothing specifically that you're looking to pull the trigger on. It's looking through, doing deep dives into where spend is and importantly looking to find where you can remove fat out of the business and not try to cut muscle. Which is, I think, is what Hendrik was alluding to earlier about, you know, you can't stop spending in the organization. It is just the continual discipline and a mindset of which we sort of push right into the business of looking at every single spend, whether it's on a travel or a promotion or anything like that. It's... There's nothing specific that you can mention. I've gone and closed an office or made a particular spend.
An example, I had to overrule one of our marketing people yesterday who wanted to put the non-execs in a really bad hotel for the strategy session. Said, "No, this is enough." There's a cost culture here.
Yeah, there's a cost culture.
Okay? you know-Not fat. If we came in fat, it would have been easy. That's maybe our challenge.
That's also is the challenge.
Okay. If we're looking at our models for this year, we take full year 2023 and add in inflation, and that would be a reasonable starting point.
Yeah. It's obviously inflation on the entire book, which was the key point I was trying to make. It's, you know, a lot of the book is not a standard inflation impact across the book.
Yeah.
Which is as I showed.
Okay.
Less than inflation.
It'll be less than inflation, yeah.
Yeah. The second question is sort of related to that, but just on the variable comps, I think you're down 6% year-over-year. I mean, I don't know whether you benchmark that against the competition and where you sort of stand or what you're seeing more broadly in the hiring market?
We pay well.
Increased pressure or some-
We pay well.
We pay well. We've criticized in the past for having a high comp ratio. We actually deliberately wanted that because we want to be known that if people do well, they pay well, but it's results-based, and if results aren't good, it's not there. Culturally, people understand at [Aluwani]. They're happy for the variability. What we don't do is when profits shoot through the roof, is not shortchange the people. It's only the, you know. That's the important part of that bargain. But at the moment, I don't see we've got a problem. If we obviously go lower, lower, we're gonna hit that problem, but it's not at all in our vocabulary at the moment.
I think you've also got to bring into account that there's a large portion of ownership in the business as well. People are aligned to what the results are. Unlike what's recently been in the press, we don't have contractual arrangements with staff either. You know, it's an agreement on how the compensation and the variable pool is actually given. We are very clear, and as I said earlier, we do concept a lot back into the business. The expectations were there.
Thank you.
We have one, Angeliki.
Good morning. Angeliki Bairaktari from JP Morgan. I want to hear your thoughts. You referenced the liberalization of exchange rules in South Africa in the press release, and you mentioned that this has not really benefited the domestic players. I was just wondering, have you seen any loss of market share in South Africa on the back of this change?
As the biggest. Angeliki, that's a good question. As the biggest domestic player, although we are also the one domestic player with a bigger international business, we are probably the best positioned in that market to deal with it.
Mm-hmm.
When your choice widens and suddenly you've got 45% instead of 25% or 30% or whatever the previous number was to dish out, every asset manager in the world shows up. I mean, from BlackRock down, they're all there.
Mm-hmm.
The choice of the client is more. Why would the client use exactly the same manager unless it's compelling and competitive? For the international, we only compete in areas where we win internationally and where we are known to be good. We can't sort of sell them just because we grew up next to them. You know, therefore, there is a natural widening of choice and therefore a market share decline for domestics.
I think our team's done really well at managing that, and our clients have also learned it's, you get more better service out of the manager who you know and have dealt with for a long time than someone who just flies in speculatively and disappears in the first cost cut when it happens in, you know, in America or somewhere else. I think over time, we'll reset. It's just not helpful. In the year when you had the worst markets, you still have that on top. You know, that's the point I'm raising. We're very comfortable competing for that market and continuing to hold our market share. It is more competitive. Sorry, Ieva, who's online?
Just a very quick reminder, if for those of you on live webcast, if you want to raise any questions, write them into the chat function. We've got three questions from Siphiwe Ziqubu from ClucasGray Asset Management. Could you please detail the increases in headcount during the year? In first half, 16 were added. In second half, 10 people were added. Which teams and roles were added to? Can you give guidance on increases to headcount for next year? Following up on that, we haven't seen meaningful change in the compensation ratio. Why is this the case given market outflows fee compression?
Okay. I'll answer the compensation. Kim will talk about the headcount. The key point here is our compensation is aligned to revenues and profitability, right? Therefore, our variable aligns with that. Our fixed is fixed. We didn't increase our except at the bottom end, we didn't increase either a head or with inflation except where we had promotions or competed for new talent. Sometimes you see the increase in fixed looks higher than it is because you had to hire someone in from somewhere else, and they were paid more wherever they were or that was their level or they were a better human capital that you were acquiring. I would say variable is very much aligned to our revenue and profitability outcomes. Therefore, it'll fluctuate with that, not with the net flow performance.
Of course, over time, net flow will impact it. On the headcount itself, I think key point is we start the year always with short of headcount that should have been hired the year before.
Yeah. Well, I think we just, we don't give detail as to where they are, but I would quite comfortably say the increases are across the board. You know, it's in some specific areas and teams, but probably less on the client group side. There'll be the uptake in operations. I'm talking about an average increase of 2%. There's a few pieces in the operational teams, and you've had a few on the investment side as well. We've just really strengthened the teams from an investment side. Looking ahead, our intention is not to grow that headcount number, if anything, try to hold on it.
Final question from Siphiwe . Can you speak to the business momentum in Asia Pacific in the second half? Are you seeing recovery in flows in that region?
Just let me come back to the headcount. There's one other point I wanted to make, is we are a people-centric business, so we don't have these corporately announced 10% or 5% cuts creating fear in the organization. If people don't deliver, they get told, and eventually they get asked to go if they haven't delivered or just their business area runs out of puff. It's not a general top-down. It's consistently managed, and that's why, as Kim says, we probably are gonna be a kind of flat headcount year. We should be more efficient with technology time.
Mm-hmm.
Our clients have been demanding more, as I said, for the same fee.
Mm-hmm.
Sometimes you just need people to help you there. What's the last question?
Flow momentum in Asia Pacific.
Asia Pacific momentum.
Those were very small number of very large asset owners having taken risk off the table with whom we have good relations.
Mm-hmm.
They will come back. They're not yet back. We've actually seen some good activity in that region. There's a decent pipeline from that region that I can confirm.
Thank you.
We're done. Thank you very much, guys. Hopefully next year.
Six months.
September, we have better news. Hopefully.
Thank you.
Bye-bye. Thank you.