Good morning, ladies and gentlemen. Welcome to the presentation of Ninety One's full year results for the 2022 financial year. Thank you very much to our clients, shareholders, regulators, and the people of Ninety One for the support and the hard work that contributed to these results. I will start the presentation with a business overview, including the summary results. Kim McFarland, our Finance Director, will present the financial review. I will then conclude with a brief outlook for the business before taking questions. You can also submit your questions during the presentation via the link on the right-hand side of your screen. This is a reminder of what Ninety One stands for. Our purpose guides our actions and reflects what really matters to us. At Ninety One, we are investing for a better tomorrow by building a better firm, investing better, and contributing to a better world.
Ninety One has been built organically and sustainably over more than three decades. Ours is a resilient and well-diversified business with an excellent long-term track record. In 2020, we became an independently listed business. The period since then has been eventful, to say the least. The cocktail of COVID, quantitative easing, crypto, China-U.S. tensions, the war in the Ukraine, and the re-emergence of inflation affected the entire world, including our business. Competitive pressures in our industry remained relentless throughout. At Ninety One, we never stopped concentrating on what we do best, serving our clients and continuing to deliver results for our stakeholders, while at the same time contributing to a better world. We reported record earnings and assets under management despite worsening market conditions towards the latter part of the reporting period, and maintained positive business momentum throughout.
We achieved net inflows across all asset classes, regions, and channels. This demonstrates the strength of our simple, yet diversified business model. Despite a challenging 4th quarter, our investment performance remains competitive. We have made meaningful progress on the sustainability front in line with our stated strategy. Finally, the staff shareholding of Ninety One increased further, which reflects our long-term commitment to the business and alignment with our shareholders. Our culture remains in good health. We worked hard to connect with and energize our people as we return to the offices. Total assets under management increased by 10% to GBP 143.9 billion. This reflects portfolio growth and net inflows of GBP 5 billion. Average assets under management, the key revenue driver, increased 16%, reflecting the higher asset levels over the period.
As far as investment performance is concerned, aggregate asset-weighted performance measures were excellent throughout the year and looked particularly good as we entered the final quarter of our financial year. However, with the market dislocation during the final quarter, a number of our larger strategies dropped below their benchmarks as at the end of March. Significant market volatility of the kind we've experienced recently makes short-term performance numbers highly dependent on the exact date used in these calculations. Our focus is performance over time, and through that, delivering the outcomes that our clients require over the long term. Kim will cover the financial results in more detail, but I will highlight the 13% growth in adjusted earnings per share and the proposed dividend growth of 16% for the full year. In line with our stated intention, staff ownership increased to 25.4% at year-end.
For the 1st part of the past financial year, market conditions were supportive. We experienced positive client sentiment and an uptick in client activity from the previous reporting period. However, the Russian invasion in Ukraine in February shook global markets and investor confidence. In addition, the rising interest rates and inflationary concerns continued to influence investor behavior. This happened against the background of already accelerating change in our industry. The sustainability imperative and evolving asset owner preferences driven by societal demands and technology are driving structural change in our industry. At Ninety One, we talk about investing for a world of change. It's not easy, but it can be rewarding in spite of the inevitable ups and downs associated with change. We know that somewhere in the discomfort of change lies opportunity.
We're a battle-hardened and resilient business with a good record of navigating change. In addition to the report, reporting record assets under management, I'm delighted to confirm that we have achieved net inflows in all asset classes, all regions, and both our client channels. Over the last five and 10 years, our assets under management grew at an annual compound rate of 9%. Since listing, assets under management grew at double that rate. We achieved net inflows in 4% of the past 5 years and in 8% of the last 10 years. At Ninety One, we don't change our approach because of short-term market events. We focus on the long term to deliver good outcomes for our clients. This approach has served us well over many years. In 2020 financial year, net inflows and positive markets contributed to a 10% increase in assets under management.
Our assets under management remain well-diversified across asset class, region, and client type. Moving into a more detailed flow analysis, we are pleased to report net inflows across all asset classes. This is in contrast to the prior year when we saw equity outflows. In fixed income, we saw GBP 2.4 billion of net inflows, largely in the emerging market strategies. Equity strategies saw GBP 1.6 billion of net inflows, principally from global and thematic strategies. In multi-asset, we saw strong inflows in South Africa, while alternatives inflows were driven by the growing interest in specialist credit. We also continue to perform well in our South African platform business. I'm pleased to report that all regions also delivered positive net inflows in the financial year. The Africa client group continued to perform very well with inflows of GBP 1.8 billion.
This was driven by multi-asset and global equity strategies, as well as inflows from our South African fund platform. Over the calendar year of 2021, we were the number one in net inflows in the South African market. The Americas client group was a close 2nd, with GBP 1.6 billion of net inflows, in contrast with outflows of GBP 0.7 billion in the prior year. The inflows were largely driven by institutional clients into fixed income, local currency, and global equity strategies. Our European client group generated solid net inflows, principally driven by fixed income. A large part of this was driven by our German clients. The Asia Pacific client group generated net inflows from Australian institutional clients, largely into global and emerging markets equity strategies, as well as fixed income. The U.K. client group achieved net inflows driven by global, including thematic equities.
In spite of the structural headwinds in U.K. equities, we continue to see good growth potential in this region. You would also have seen a range of new appointments announced in this client group to further enhance our competitiveness in the U.K. market. Finally, I'm pleased to report net inflows from both institutional and advisor channels across the world. The advisor channel saw healthy net inflows from Africa and U.K. client groups into global and thematic equities. Flows in the institutional channel were driven by Europe, Americas, and Asia Pacific client groups, mainly into fixed income strategies. Onto investment performance, market conditions were supportive for the 1st three quarters, you know, with our three-year firmwide outperformance at 31 December 2021 at 89%. This is a really good number.
In the final quarter, market volatility increased substantially, as I said earlier, and impacted our performance. Our three-year firmwide outperformance remains competitive at 68% of our strategies outperforming their benchmark on an asset-weighted basis. Over the long term, the firmwide outperformance remained at 80%, at 86% over five and 10 years respectively. Our long-term mutual fund investment performance remained competitive, though our shorter performance has deteriorated due to the factors mentioned earlier. At Ninety One, we run our different strategies in line with clearly defined processes. These tend to work over the course of a cycle and, like 2020, need some time to adjust after a market shock. This time is no different. Since we do not chop and change in periods of market volatility or in periods of underperformance, I'm confident that our shorter-term performance numbers will recover.
As ever, our focus remains on delivering competitive long-term investment performance for our clients. There is no formula to create short-term performance. What we can do is to provide our teams with the right resources and create the conditions for sustained high performance over time. This is what we really manage on a daily basis. We create the conditions where good investors can thrive over time. We also encourage innovation and creativity. At Ninety One, freedom to create is one of the key tenets of our culture. We need to remain relevant to the requirements of our clients and society at large. We borrow the format of this chart from a respected industry peer, because we do read their results presentations as well.
It shows what our long-term strategies launched over the last five years have gathered in terms of net inflows, in terms of assets under management, but new strategies. On average, we launched between two and three strategies per year over the last five years. This added GBP 2.7 billion to net inflows in the final year, and it added approximately GBP 5 billion of assets to our book over the last five years. As mentioned above, this was driven by thematic equity and credit strategies. Now, so for thematic equity, the biggest part is sustainable equity strategies, which obviously were quite popular. We have made good progress over the last year, and sticking to our strategy of organic growth within very clear strategic parameters. We continue to invest to support long-term growth and competitiveness, bolstering our investment, client and operational platforms where necessary.
We made progress in the Americas and the U.K., demonstrated by the net inflows in both regions. Our South African business continued to perform well from already elevated levels against a very difficult economic and market background. Our ongoing commitment to this market has paid off. Ninety One has a solid platform for future growth. The brand has momentum. What I mean by this is that over the years it has become progressively easier to do business anywhere in the world where we choose to do. We have long, credible organic track records, and we are known entity in most of our major markets. Across the board, our market positions have improved over time, facilitating new business. This is because of the brand equity that we've built over many years.
Here I'm not referring to the name Ninety One, but to the positions we have carved out in our various markets through being there over the long term. This is not easy to replicate. This takes time and effort and consistent presence and good results. Our competitive position in our chosen channels is much better than five or 10 years ago. It is difficult to measure that, but it's easy to experience. We are continuing to scale up some of our strategies, and now we have 35 strategies larger than GBP 1 billion, compared to 21 strategies in 2017. There's a lot more we can do on this front. The strategies larger than GBP 1 billion now represent 76% of assets under management, as opposed to 66% in 2017.
Scaling already successful strategies while remaining mindful of alpha generation is the best way to improve the economics of our kind of firm. Finally, I can confirm with you that our access to talent continues to improve. Ninety One is an attractive place to work for successful people in our industry. We see good growth opportunities in the North American institutional market. We are well invested here, but we have much work to do to achieve our full potential. This is where the big prize is. In the U.K., we have invested heavily in the business over the past few years, and we are starting to see results. This is just the beginning. In the long term, we remain committed to developing our business in Asia, including China.
In addition to these regional growth vectors, we are optimistic about our prospects in thematic equities, especially on the sustainability front and the longer term opportunities in the specialist credit business. Strategy is important, but execution really matters in this industry. I don't think back in January, any one of us in this room or on the call would have predicted that there would be a war, a real war in Europe with a crisis that would impact so many countries and so many people. While the direct impact of the Russian invasion on Ninety One has been minimal, the indirect impact has been substantial. No one knows how long this war will continue or to what extent it'll influence investors' perceptions of emerging markets in the near term.
Given our diversified offering, we believe we can continue to serve our clients and generate flows in the long term. It is early days, but the substantial relaxation of exchange controls in South Africa could have a profound impact on the local institutional market over the coming years. As a global fund manager with a leading market share in South Africa, we are ready to compete for the expected flows towards international investment. This change will nevertheless be challenging for domestic industry participants, and we're a leader in the domestic industry. We continue to explore opportunities in China. Just after year-end, we've been awarded a substantial mandate from one of the most respected asset owners over there. Our strategy will take time to unfold, especially given the limitations, you know, due to the travel restrictions relating to COVID.
Our commitment to put sustainability at the core of our business progressed over the past year across our entire business. Remember, we organize our sustainability effort along three pillars, invest, advocate, and inhabit. Last year, we have introduced a clear framework called Sustainability 3.0, which focuses on real-world impact of what we do. At Ninety One, we consider climate as the immediate priority. We advocate real-world decarbonization in line with our net zero objective. We focus on inclusive transition, especially from an emerging markets perspective, not on portfolio decarbonization. We work constructively with clients and portfolio companies around the world. We continue to engage our shareholders on this important topic, and we appreciate their support and interest. This is why we will ask our shareholders to vote again on our Say on Climate resolution at the upcoming AGM.
Finally, we have appointed a Chief Sustainability Officer, Nazmeera Moola, who is responsible for the delivery of our sustainability strategy and has been instrumental in the preparation of our own transition plans. This slide provides a summary of our approach to net zero and our interim SBTi-aligned targets. In June 2021, we joined the Net Zero Asset Managers initiative. Our approach to net zero is based on the pursuit of real-world decarbonization or real-world results as opposed to portfolio decarbonization, and the need for a fair transition, which includes the people of emerging markets. We have also produced a transition plan with clear quantitative targets for the investments we manage on behalf of our clients as well as our own operations. Detail of our transition plan will be published in our sustainability report in June.
Now, let me talk to you about the most important part of our business, our people. We were pleased to see our people return to our offices following the period of social restrictions. We felt we needed to reconnect, reinforce our culture, especially for the benefit of the newer members of the Ninety One team. In this regard, we have completed 37 in-person workshops over the year with 900 of our staff. I have personally attended more than half of them, and the feedback has been positive, and we can feel the buzz around our offices and in Ninety One again. Our people form an essential part of our value proposition, which is why we continue to focus on talent density, building a well-diversified and intergenerational business. Significant employee participation is fundamental to our business model.
The people who work at Ninety One now form the largest shareholder block, which demonstrates long-term commitment and alignment. In summary, we are pleased to have reported record earnings and assets under management and net inflows in all our channels, regions, and asset classes. Our investment performance remains competitive. We have made a solid progress in our commitments to sustainability, publishing our transition plan, and we are committed to investing for a better world and making a real difference. Finally, we increased our shareholding in Ninety One, and continue to focus on our culture and people. Our consistent strategy continues to deliver results in volatile markets. Now I'll hand over to Kim McFarland, our Finance Director, to take you through the financial review before concluding with brief comments on the outlook. Kim, thank you.
Thank you, Hendrik, and good morning to you all. Once again, I'm pleased to present another set of strong financial results for the year ended March 2022. The highlights are as follows. Adjusted operating revenue increased by 10% to GBP 663.9 million. Adjusted operating expenses increased by 9% to GBP 433.5 million. This resulted in an adjusted operating profit of GBP 230.4 million, an increase of 12%. I will go into more detail on these figures over the next few slides. When taking into account adjusted net interest income, the share scheme net credit for this year, and Silica profit for the prior year only, Ninety One profit before tax and exceptional items increased by 20% to GBP 252.2 million.
Consistently, I've reported adjusted operating profit by removing the impact of Silica 3rd-party revenue and expenses in the prior year, as well as the contra impact of the revaluation of the deferred employee benefit scheme. As I mentioned at the interim results, we completed the sale of Silica to FNZ in April 2021. The interest expense on our lease liabilities for our office premises of GBP 3.8 million for FY 2022 is reported in adjusted operating expenses. All remuneration expenses, including the share scheme allocation, have been included in adjusted operating expenses. The share scheme net credit has arisen as a result of the accounting requirement to amortize the share scheme expense over the vesting period. The reason for the increase in this number is the significant equity participation in the share scheme by our staff. It was immaterial last year.
The adjusted operating profit margin increased from 34.2% to 34.7%. Our adjusted EPS shows a 13% growth, reflecting a set of strong financial results for the year. Saying that, I will just caution here for a more challenging year ahead. We are confident that the adjusted results, as referred to here, reflect the true operating position of the business. Right. Continuing from there, the exceptional items of GBP 14.9 million reflects the pre-tax profit received on the sale of Silica in April 2021. In the financial year 2021, exceptional expenses reflected the spend relating to the completion of the rebranding of Ninety One. The effective tax rate for the period was 23.1%, down from 24.3% in 2021.
The above factors result in profit after tax increasing by 33% to GBP 205.3 million. This slide provides further details on the adjusted operating revenue, which increased to GBP 663.9 million. Management fees increased by 13% to GBP 632.8 million. This was predominantly driven by the increase in average AUM from GBP 119.9 billion to GBP 138.6 billion, a 16% increase. This AUM growth drove the increase in management fees but was offset by a decline in the average fee rate to 45.7 basis points from 46.8 basis points. In the main, this was due to a change in the mix of strategies owned by our clients.
The fee rate was unchanged in the 2nd half of the year as we maintained our price discipline. However, we do continue to have pressure on fees, and with the client mix changing, we'll guide cautiously to this being margin down in the year ahead. Performance fees continue to decrease from the high level seen in 2021, although still a positive contribution at GBP 31.1 million. This was driven by a fairly equal mix of relative and absolute investment outperformance in the selection of South African strategies. Again, we don't foresee this increasing in the year ahead.
The foreign exchange gain of GBP 1.2 million was mainly due to the translation of U.S. dollar assets, with the weakening of the pound sterling in the year from GBP 1.38-GBP 1.34 as at the end of March 2022. The rand also strengthened in the last month against the pound to GBP 19.03, which had a positive impact on our closing AUM. Other losses of GBP 1.2 million arose primarily from mark-to-market revaluations of seed capital. The next slide shows the build of the adjusted operating expenses year-on-year. All areas showing an increase from the prior year, with the total adjusted operating expenses increasing by 9% to GBP 433.5 million.
A key driver was, once again, employee remuneration which remains at 68% of our cost base, increasing by 9% to GBP 294.4 million. This was principally driven by variable remuneration, which is over 50% of employee remuneration, and which grew in line with the increase in adjusted operating profit. Overall, this resulted in a compensation ratio of 44%, down 1% from the prior year, and average headcount grew by 1%. I've split the business expenses into post-COVID related spend, which is travel and promotional, and then all the other expenses. As expected, there was an uptick in the post-COVID expenses as restrictions were eased, and this was coming off a very low base.
Importantly, other expenses only increased by 6% in line with business activity and inflation, the largest cost being client and retail fund administration. The year-on-year split of these expenses largely remains unchanged. Looking ahead, we're expecting the fixed costs to increase with inflationary pressure and continued business momentum. Noting there's nothing material planned in the financial year ahead. This slide is showing the business expenses and total expenses as a percentage of average AUM in bps over a six-year period, so covering the period pre and post the listing in March 2020. A single message here is the consistency of business expenses as the business has grown and developed and scale is being achieved on a moderate level. If anything, this chart demonstrates our cost control and discipline as the bps have declined slightly over the period while our assets under management have increased.
To summarize here, this is a graphical representation of the absolute movement and our profit before tax from FY 2021 to FY 2022. Our profit before tax and exceptionals at FY2021 was GBP 210.1 million. Management fees increased by GBP 71.8 million. Performance fees decreased by GBP 14.3 million. Employee remuneration increased by GBP 23.1 million. Business expenses also increased by GBP 13.1 million. Adjusting for the increase in other items, such as the share scheme net credit, FX gains and losses, and adjusted net interest income of GBP 20.8 million, the profit before tax and exceptional items was GBP 252.2 million. Adding the exceptional item of GBP 14.9 million from the sale of Silica resulted in FY 2022 profit before tax of GBP 267.1 million, as reflected in the earlier slide.
My final slide summarizes the Ninety One balance sheet and capital position at the end of the financial year. Ninety One qualifying capital increased to GBP 340 million. As we move into the new regulatory capital regime in the U.K., you can note here the minimal impact to our qualifying capital, with the decrease largely driven by adjustments for deferred tax. Estimated regulatory requirements increased in line with the growth of underlying expenses. In line with our dividend policy, the board has recommended a final dividend of GBP 7.7 pence, taking the full dividend to GBP 14.6 pence per share. After this payment, there will be an estimated capital surplus of GBP 128.8 million. This will result in a capital coverage of 213%.
This is above the 30% coverage we've been targeting, and up from the 172% in the prior year. In line with these proposals, and this capital buffer, we remain committed to a capital-light model. Furthermore, at this time, there are no plans to increase the number of shares in issue, nor encumber the group balance sheet with debt. Thank you. I'll now pass back to Hendrik.
Thank you, Kim. You're going to stay here because they're gonna ask questions. Before I move to the outlook, let me remind you to submit your questions via the button on the right-hand side of your screen. We're grateful to have reported good results, but there are challenges ahead. We're focused on serving our clients and sticking to our strategy. Our track record, experience, and stability give us confidence for the future. Sustainability is central to our future. We are positioning Ninety One on the right side of history. We have substantial growth opportunities within our strategic parameters. Our focus is on the execution of our strategy. In spite of near-term challenges, we face the future with confidence. Thank you very much. We're now ready for questions. Hubert, you're always 1st. Go for it.
Good morning. It's Hubert Lam from Bank of America. Three questions.
Sorry, I should've said Bank of America. I forgot to give the ad plug, yeah.
Three questions. Firstly, on operating margin. You had 35% for this year. Probably expect it to come under pressure just because the markets and on revenues. But at the same time, you do have a high degree of cost variability as well. So how should we think about operating margin for this year? What are you targeting? Second question is on products. Obviously, you know, traditional asset classes are under pressure, both fixed income as well as equities. Just wondering what clients are looking at now. What do you see as the main products you can sell this year, just given the macro context? Last question's on China.
Three.
Three.
Yeah, yeah.
Last question's on China.
Keeping him to it.
Yeah. Last question's on China. You said, you know, you reiterated that this is a key market for you. Some of your peers have gone into the market by having joint ventures with other banks, and some of them have also created their own financial company. Just wondering what your approach is in penetrating the Chinese market. Thanks.
May I ask us to answer in reverse?
Okay.
Just remind me your 2nd question. You were talking about.
Sure.
I mean, the 1st one's margin. The 2nd one?
Yeah. First one's operating margin, 2nd one's on products.
Products.
Yeah. How do you see the product mix going forward?
Yes.
given the markets?
Yeah. Let's start with the kinda commercial discussion, China products, and then get to the outcome, which is margin.
Mm-hmm.
Which frames the operating margin point. For us, it's an outcome rather than a short-term objective. Because we don't run the business to near-term targets because of the high beta and the volatility. Of course, we care about bands. But on the China point, I mean, we're just taking a step back. If you came from Mars, and you looked for growing investment management markets in the world, the one that'll scream at you is China, particularly the domestic market. There's not much happening cross-border. There's some happening. But the domestic market is expanding. We don't believe, number one, that China is uninvestable.
Number two, we've seen our peers, very respected peers, who've been in that market for years, and that's one of the reasons why they could evolve their businesses fast, because they were actually in there. They didn't go there. They had a Zoom call from London or New York, and actually, the guys on the ground were developing the business. We said we should be cautious in this period because we don't, you know, we're kind of old-fashioned. We don't do online dating. We actually wanna see people, talk to people, understand. We are committed to exploring the opportunity that the Chinese market is offering, noting that we're a very experienced investor in China. We have very substantial amounts of money deployed there. We know the place, and we have some very good client relationships.
That's the reason why we keep flagging it, because other firms have said, "I'm not interested, I'm dealing with Western Europe or U.S." Really a key point. Even if the emerging market universe evolves to something where China becomes an entity by itself and maybe not even treated as part of the emerging market universe, it's an area of interest, and it's an area we're gonna spend strategic time. However, we didn't feel comfortable that given the restrictions, particularly of initially in the West and lately imposed on China, it made sense to go and rush it. That's the 1st point. In order of priority, as I said in the presentation, the North American prize is a closer one, if I talk of regions outside our what I would call our domestic regions. Okay.
On the product front, what we intend to do in the long run, we feel that if we do well, what do we do well? As we've shown with the growth in thematic equities over the last few years, there are significant opportunities within our strategic parameters for those who do well. It is more volatile. Yes, it's great to get a year higher rating if you compete in private markets and that, but it takes a long time, and we've decided to focus on the credit end as opposed to the equity end, and we've decided to add a thematic flavor to our mainstream business.
We believe in the mainstream active business, if you do your job well, you generate your alphas over time, there will be demand for, and particularly for managers at our scale. Our answer may not be the same if we were standing here as a $2 trillion manager. Understand the difference. Go and look at, for example, T. Rowe Price's numbers. I mean, fantastic if you look at, you know, what they've achieved over time. They're significantly larger, they're very focused on. From a fee rate point of view, we are not really interested in going into areas where we do business for at very low fees just to generate flow. That's our philosophical point.
We would like to migrate towards higher value part of the industry, but we recognize how hard it is, and very importantly, staying focused, staying in our lane, doing it really well, might just have a prize on the other side, while many others are defocusing their operations into other areas. That's the framework within which we develop our business. Kim, on operating margin, I think you can talk about that.
I think, yeah. I think the point is that it's not a target, but you're right, it's a number that we do look at all the time, and I think we're gonna see some downward pressure this year. I mean, you all note the inflation comments this morning. I mean, we know there's inflation coming in. As you quite rightly said, we do have the ability to flex some of our cost base, especially on the variable side. It was high. You're also gonna have less, you know, I've cautioned on the performance fees, which has always been something that's just dropped through and helped the operating margin at the same time. Really looking at it next year, we had a high operating margin being above 35%. You know, I'm gonna see that coming down, but not materially in the year ahead.
And we-
Just by the normal market pressures that we're actually seeing.
We will never go to boutique operating margins. If we go there, we will be investing. Remember, a big part of our expense is just investing in future. You know, you can sort of milk this business and I see Neil nodding there from finance team. We could squeeze this margin up to 40%.
Yeah.
That'll be three years. Maybe if we were short-termist, and we were thinking in terms of.
Yeah
You know, call it, you know, short-term horizons, we could do fancy things with the numbers and then leave a shell behind. This is not how we operate.
Yeah.
I think another very important point about this business and the financial side is I got asked a question this morning by a journalist: "What about inflation?
Mm-hmm.
Well, let me just be very clear. We don't employ workers on the breadline. All our people can pay their electricity, can do things. We all flex together when times are tough. This firm is not guaranteeing government-style increases to people when there is no outcome for shareholders. That will be the case because no one's gonna go hungry. You saw the not large number of the 44% compensation ratio. This is not a business where we, like an industrial business or a mining business sitting with thousands of people on the margins who are really feeling pain.
Mm-hmm.
Therefore, our inflation impact, and we expect our suppliers to behave similarly. You know, we are not gonna tolerate excessive cost increases just because the oil price goes up. We don't have trucks parked outside this business.
I think a point to note is if we cover the inflation point, because I think that's something that people are gonna raise here. 68% of our cost base is people. So you've got to look at the balance of what's there. At least half of the other largest cost is our client and retail admin, which doesn't have an inflation link to it either. The other big chunk is gonna be accommodation. There's not an inflation link. You kind of break it down to almost looking at the numbers, about half of what's left over is gonna have an inflation hit, which is naturally gonna come through for whatever reasons. It's the fact you've got such a big chunk in people.
Yeah.
Unfortunately, we're a March year-end, so we gave increases to staff in March.
Also, we don't do unguided technology investment. I mean, I think Kim, when she was the Chief Operating Officer, was very good at that. Sometimes to the point of, I guess, we constrained ourselves. We know how much money is being blown in this industry on vanity projects. This is not what we do.
Of course, sure.
Okay. David. David McCann from Numis, I'll give you a plug.
Yeah. Thanks, Hendrik, to introduce myself. Thanks, Hendrik. Three questions from me as well. First one, actually just following on from the point you mentioned in response to one of Hubert's questions about you know wanting to position the firm kind of into higher alpha or thematic type strategies in the future. Where would you say on balance the business is today between I guess what you would call more traditional geographic focus traditional strategies versus those kind of higher alpha or thematic strategies? Where are we today and where would you like to get to? I guess that's question one. Question two, kind of dividend question. I don't believe you actually have a progressive policy officially stated. It you know you've obviously paid around 75% since listing.
Mm-hmm.
On the likelihood that when we look today, you know, the profit may well be down, adjusted profit may well be down this time next year on this year's numbers. How should we think about the dividend? Would you defend it given the strong capital surplus you reported, or should we expect it just to, you know, flex with this roughly 75% effective payout? The 3rd one, just a technical one on that surplus. With the new capital regime, you know, both the non-qualifying capital deduction has gone up as well as the regulatory requirement. Could you just talk through the drivers behind those? Thank you.
I think Kim can do the 1st two, and then I'll.
The last two.
The last two, and I'll do the 1st one last. How's that, Kim?
Okay. That's fine. I mean, the 1st one is we don't have a progressive dividend policy. You're quite right. Our dividend payout will be looking at what our adjusted profits are next year, again, after tax. We'll look to see what they are, and we're sort of, as you've seen, sort of looking around the 70%, 80%, in that we did 70% at the interim. We've done 80% now at the final, sort of averaging out of that sort of 75%. Working through the board, it's gonna be that similar. No, we won't sit to try to defend the dividend, off the back of that. Again, looking at if there are any other capital commitments we have within the business. No, we don't have progressive dividends. I think it answers that point there. The 2nd one is...
Yes, it would flex with what our profit after tax actually is. The 2nd one, on the capital, you saw there wasn't a large change in the actual capital numbers. I said that the main adjustment was just on the deferred tax, which was on the regulatory capital piece, and that's what one of the changes were there. The risk, I mean, our capital move is largely based on expense requirements in the various countries. It's largely a percentage of what our year expense base is. I mean, we have a few other tweaks in South Africa, but the expense base is largely moving off the back. Our expense, our regulatory capital requirement is largely moving off the back of our expense requirements.
Just to clarify, it was mainly the deferred tax element that was.
Yeah. Yeah.
reducing the qualifying capital.
Yeah. Yeah.
The reg requirement has just changed with the.
Expenses.
Okay.
Yeah. Yeah.
David, coming back to our kind of product mix or our what we offer clients. I think we're living in one of the most exciting, fast-changing times in human history. I mean, even the tech story that started with the dot-com crash basically is only playing out. You know, there are enormous opportunities. We sense that in the thematic space, there will be newer long-term opportunities. Right now, we're very focused on the sustainability, and we've really recently expanded our sustainability offering across the board for investors who want both in the illiquid and the liquid spaces and in the debt and the equity spaces. This movie has only started.
It doesn't mean you are oblivious of the fact that there is right now a commodity boom and that markets are different. Institutional asset owners also have targets to meet around changing of their portfolios or evolving, and they need help. We think firms like us who well grounded in general investment disciplines can add. There will be more themes rolling out. I mean, if I can mention a whole lot to you, but many of that are really early stage, and I wouldn't want to mention that in the public market, that we will add to our mainstream strategies. The big money will take years and years or very long to move from mainstream, and we don't think the entire world is gonna be parked in private assets. We just don't think so.
We think it's a great growth opportunity, and, you know, would've loved to be Blackstone today and present my results to you or some, you know, in that position or in the markets they are. We think public markets are gonna remain a very important part of the mix and a part where once and I keep saying that, and we're not there yet. Once our industry is fully repriced to passive as cheap as it should be, the fee budgets and a significant amount of fee budgets are going to very expensive illiquid strategies. Actually, we think the fee pressure in the middle for really good offerings will be less. We've reached the point where we can operate in the kind of 45 basis point, 40 basis point-50 basis point world, and we don't think it's gonna go to 20 basis point or 25 basis point.
Therefore, adding the necessary scale to strategies, becoming a haven for talent, where often that talent in firms pivoting away feel underappreciated, is a sensible strategy for us. So we You know, if you go around the world, there's not many 30%+ operating margin industries in the world. We're so depressed about ourselves. Actually, operating with very light balance sheet at very big operating margins in a market which is very, very large, if you take the combined revenue in the revenue pools of our industry. We find that attractive, and we think if we stay focused on it and not get confused by sort of near-term narrative or fatigue of the narrative.
'Cause one of the big things is the fatigue of the narrative gets you, and then you wanna go and do something crazy. Then you're gonna pay a multiple of 45 for a small boutique to change your business, and then you find out the cultures don't work and things don't. You know? We are very cautious about those risks. What we must do, and I think that's the qualifier, we must be very close to where our clients, the asset owners and the ultimate owners of the real money and risk, where they want to evolve to and what they are thinking. Quite clearly, they are telling us, "If you wanna be in the active game, you've gotta be good.
If you're mediocre, as you guys predicted, or worse than mediocre, and you charge a high fee, you're gonna be out of business." We accept that given the calculations or given the return opportunities in our industry. That's, I think, why our position looks as if it is a pure defense of the traditional. It isn't. It's an upping of the game in a business which is naturally maturing, but with very substantial opportunities given our scale in particular. That's the sort of. That doesn't mean we're not gonna get a hiding if we do badly for three or four years in a row. That doesn't mean that. We're happy to take that risk because that's our business. Ryan, I'll give you opportunity. Oh, no, sorry.
It's okay.
Gurjit from J.P. Morgan.
Mm-hmm. Thank you, Hendrik. Just a few questions. In terms of the U.S., obviously you've made some good progress there in terms of flows. You know, what differentiates Ninety One? So why does a client in the U.S. come to Ninety One, you know, versus all the peers out there globally? First question. Secondly, just what are the sort of key hires you've made this year? If you could maybe highlight a few of the areas where you've been investing for growth. Then finally, just on the mutual fund investment performance, if I look at the sort of one- and three-year numbers, they look sort of average. They're sort of around 50% on the three years this year and also last year.
No, one year.
One. I think the three years was also 50%.
No.
I think it's 49%, bench 21st.
Oh, yeah. The mutual.
Yeah. That's been sort of stable versus 2021, so it hasn't really changed much. What's going on there on the mutual funds? Any particular funds suffering?
Next year, if I get this question, the chief investment officers who are sitting here will answer, but I'll answer this year. The point is, I said it in the presentation, actually, last year when we hit, literally when we hit the sort of year-end, things were quite average in one part, but the numbers were actually excellent over three years from the year before. You know, we had a massive improvement. That improvement continued into December and January. Then the world kind of changed. Now, if you have systematic processes, you tend to take a bit of time to adjust. The correlations go to one in spite of the diversity investment strategies you have. If you were a... No, no, thank God we were not a growth investor. Then we would've looked a lot worse.
We need to get our way back. You know, we need to crawl our way back. Interesting, our three-year performances haven't really been that much affected over the period. In the mutual fund case, you must also look, we look at quartiles, and in those quartile boxes, you have very different strategies in one box. So I would rather look at the institutional benchmark related one as a true performance indicator because, for example, one of our best-selling strategies, quality, has been relatively modest, doing modestly against indices. Because it's solid and secure, and it's the kind of stuff people can sleep on, the clients are very comfortable that it's doing what it's supposed to do, and they keep buying it. So there's another level of sophistication which can take us a long time.
In time, if those aggregate numbers don't look good and competitive, you will be affected. I would rather look at it over a three to five year period and say, "How many excuses have you come with here?" Rather than looking at one particular very volatile moment, which I think will wash out, you know, towards the end of the year. How quickly? I don't know. And that is why it's really key to make sure your teams retain their confidence and do what they do. We're not going in there disrupting, telling them what to do, et cetera. We were very happy with those processes when they were working. We now need to apply them properly, and we need to learn from our mistakes. I would say I'm actually not that concerned.
If it persists. It's really important in this industry if the clients, and it's not so much shell, if the clients get a sense that, okay, the house is not performing in general, it does have a general impact on your ability to produce business. I don't think we're there yet. What we were doing is highlighting that we're very alert to that challenge and that we're gonna give it our best shot to make sure our numbers get to where they are. I'm not uncomfortable given the diversity. That's the 1st question. Your
New hires.
Your other question was the hires. I think where we put some investment in was in our sustainable equity team in particular. We've built it out to offer an emerging market version, to offer a global version, and to have a positive inclusion strategy there, which has actually attracted good flows, our global environment strategy. We've invested substantially in our skills around, not many people, but in being very close to the wind in the sustainability world. Not just Nazmeera, but around her, we've strengthened the team to be close to it, to asset owners. In areas like the SMI or in efforts like the Sustainable Markets Initiative or GFANZ, there's a huge amount of work going on between managers, owners, et cetera.
We are very close to that, and we understand what's happening, and we are thinking solutions oriented with them. That's the solutions business we want to bring. We're not bringing the classic solutions business of taking a consulting firm and giving a client the whole solution, which is what some of our peers are doing very credibly. I mean, you know, some of them are doing extremely well there. We've decided that's not our fight. Our fight is to provide active solutions in the repositioning towards more sustainable portfolios for the long term. We think there is a very substantial potential. But we need to be much more concrete before we can talk details to you. That's where we've largely invested. But we've generally. What we do is we don't create one big new.
Of course, in our specialist credit, which I've signaled now, it'll take a number of years. One of my peers the other day said. I spoke to him about all his private market stuff. He says, "This is great, but it's gonna be for two generations of management after me benefiting from it.
Mm-hmm.
These things are slow burns. There's some of that investment happening in that cost base that Kim has shown.
Yes. Just on the U.S., the U.S. market.
The U.S. market. What differentiates us. We don't have the J.P. Morgan label. That would have been nice. Ours is one of a focus specialist also hiring high quality client-facing people who probably like to work in smaller, more entrepreneurial environments. They want to have the substance of a strong investment platform and a diversified investment platform behind them. Often you find really great client-facing people, but they don't wanna just call the client once a year on one strategy. They want to do more. We try to provide that mix, but also a place where they can really feel they build it. From an investment point of view, what do we do well? Global and international investing, including EM. As the U.S. or as North America starts thinking about rebalancing.
I remember last year, everyone was in five stocks. You didn't have to do anything else except buy five stocks. Actually, the world's gonna change, and it's changing right in front of our eyes. People are looking wider. They have complex questions to ask about, you know, international investment. That is where we come in as an authentic, emerging market rooted, and global investor. Having both the sort of London face and the emerging market face to them, and therefore we have a conversation. I think it's in this industry, you only marginally differentiate it. No one is completely differentiated unless you're in this, dominant in a class. Clearly that, if we achieve that, we'll telegraph it, and you will give us a multiple of 25 or 30, but that's not yet.
Mm-hmm.
Any-
Thank you.
Rahim from Investec.
Thank you. I'll stick with the tradition of three questions.
You guys.
Uh-
Can we have some buy-side guys ask? You only ask one.
The 1st is, you gave some useful stats in terms of scale of the business. I was wondering if you could perhaps talk about capacity and how you think about that. The 2nd was around talent. Again, you mentioned that a lot. If you could perhaps talk about the competitive landscape, what you're seeing and, you know, pressures in terms of, you know, cost and pricing there. Finally, I think it's probably an impossible question to answer, but I'll ask anyway. Around performance fees this time last year, you gave clear guidance that it should be down.
Mm-hmm.
You obviously talked about the importance of operational leverage. If you have any inkling of where we should be putting our number in that would be helpful.
Okay. Performance fee number, we can't really guide more than we've said.
It'll be down, yeah.
Understand that we've got a mix of absolute and relative strategies, okay? When you have downward absolute, the absolute ones drop out. Inflation plus, you know, inflation is so high now, so it's just. That's why Kim guided downwards. Help me with your question. Sorry, three. I've just got on the 1st one. I've not listened properly, Rahim.
The 1st was on scale versus.
Scale.
Scale.
Let me do the scale. Let me do one by one. The scale one is. What's interesting, we also close, or when things don't work, we start really small because we don't seed. Kim always makes the point, we don't have a big seed capital book. We go find a friendly client, which is really hard. By the time you've got the friendly client, you've probably got a proposition that's good enough to go to market. We don't start too many things. It's really hard to start something, yeah. When you get it going. If it either disappoints or doesn't deliver, you, in order to retain the relationship with that client, you also sit down with the client, you say, "Look, this is not gonna deliver what you expect.
Cut it. We are quite disciplined in terms of the number of strategies we start and back, 1stly, how we let it through. Even if it's in the immature phase and it looks as if it's not going to achieve, even if it-
Mm-hmm
is okay, we would probably go to the client or the backer and say that this is just not it. Unless they insist to stay in it, we will then deploy resources elsewhere. We're quite disciplined about the strategies. Going on to capacity, if I can have my life over again, okay? Very few regrets, and the CIOs are smiling there at the back. We would not plan anything which has a near-term capacity limit because the problem of that is if you're in the West End, in the hedge fund world, and you charge two and 20 and you close your fund, you go on retirement, it's all fine.
In our case, if you switch off the large asset owners at some point when they wanted to deploy assets to you, and they've done work on your teams, and they've thought about you, and you say no, they don't come back that easily. You know, we've got a few strategies here where we didn't think through the capacity implications earlier, and we actually had more capacity, and we closed too early because we were just concerned. Other people replace you. We focus on designing scalable strategies. Not, obviously, not scalable to BlackRock size, but scalable strategies that could be substantial in our business, and we stick to them. When it is a, what I would call a niche strategy, we are very clear about the purpose and about not taking it into our whole network.
I think we've by and large, after three decades, kind of grown away from creating our own capacity problems. What we are sensitive to, though, is if our portfolio managers tell us, "I have no liquidity in this market. I need more. I struggle to work. I can't cope with flows," then we will go and have a word with our clients and switch it off, even if it is a commercially expensive decision, because the result for the client comes 1st. Right now, I don't know. I don't think we have any strategies where we're so overwhelmed by clients that we have to close. I think we will hold our price line well when it is a truly capacity-constrained strategy. I don't believe that pure liquidity is this.
If you have genuine long-term investors, they can be in fairly illiquid strategies, but they understand the implications. The problem is in mutual funds. When you open mutual funds, you put exotic strategies in your mutual funds, and you get liquidity problems when everyone is now disappointed about the latest fad not having worked. That's what we definitely don't even go near there. I don't think there's one of our mutual funds that has anything of that kind in. Conservative strategies, scalable, but very honest about alpha and, therefore, willingness to close. We do not use capacity as a way to artificially price up either, because that doesn't work for good long-term client relations. I don't know whether any of our colleagues want to add something here.
I think you were also asking the question about operational capacity, or you're talking about investment capacity.
More on, you know, investment capacity.
Okay.
But happy to-
That's what I meant. No, no, I'm happy to have you answer the question.
Happy to take it from an operational point.
No, that's.
Yeah.
Just operational capacity is one of these. You have an infrastructure platform, so I can answer it.
Yeah.
I mean, one has the platform, you have the infrastructure. It's almost the point earlier, you could basically just squeeze that and not invest. Where you struggle in this industry always to get the operational scale on that, on the back of it is that you're continually investing. As Henry was pointing to earlier, we could just squeeze the business and improve our operating margin, you know, if we wanted to, but then where would we be in three years' time? It's almost the scale you're achieving off the platform you're using to reinvest into other opportunities all the time.
If we were in an undynamic, uncompetitive market, scale would be brilliant in this industry. The problem is the guys across the road here, they are consistently improving their offering to clients. They're consistently putting better people.
Right.
You know, have you noticed every asset manager now has an institute? That's a whole army of research people producing intelligent things at no revenue, okay? That's a service for clients. The quality of technology, the experience. I hope at some point we're gonna have the reverse, i.e., positive technology leverage. Haven't seen that now, and I think, Gurjit, if I look at the J.P. Morgan numbers and I look how much you guys spend, I also haven't seen the leverage in many places. It's something that's coming down the line. For us, we are in an increasingly competitive industry and you've got to run hard. That is probably the key message. To retain those kind of numbers and metrics, you've got to be better. You can't stay the same.
Okay.
Anything? Any other questions?
Sorry. Can I just-
Yes.
Just ask or answer on the question around.
You want to share? Yeah, Investec has shares, so you can ask another question. I know you're not conflicted.
No, but the 2nd question in terms of talent and
Okay
... the pressures of-
The talent market, I think I've never seen. It's the same point we made around brand. It's not, as I say, the Ninety One brand, it's the brand of our people in the market. I've not seen, except for the very difficult and hot market is the North American market. Really hard to get, and many of our peers, European peers, say exactly the same thing. It's just so hot and so competitive. Although we think we've got good people because they want to be with us. We've got to provide a culture fit. In most of the markets we operate, we're seeing really top-level people either talking to us of own volition or being open to talk to us, where we discuss and think about new opportunities or improving. You know, we've...
We typically hire just north of the marzipan layer, so the talented number twos and threes. The market is really open. It's a question. Our question is always, can we deliver for these people as well as they can, either at their existing organization or where they can go. It's been a lot easier. It's progressively becoming easier, which then puts us in a better position to accelerate growth. We've got to show you the results still. I must say the talent conversation is one of the easier conversations we have in this firm, because our proposition is so clear. Which means people we previously would have tried to recruit will de-select themselves automatically because they know this is not where they want to work. Sorry.
Yeah, thanks. Yeah. I've just got two questions which is going to be a relief to you. Just specifically, outlook questions at the risk of asking you to sort of fill our models in for us. On torque ratio, you've done 3.8% last year. We've talked about more difficult markets. Some of the performance numbers, a little bit weaker into the beginning of this year. I mean, do you think positive torque is still a realistic prospect for this year?
Well, we don't give forward guidance. What we're telling you is we think we've got enough irons in the fire, and we definitely gonna give it a go. You know, when you have near-term numbers to restore in that, torque ratios of north of where we were last year will be kind of demanding because your assets obviously haven't fallen that much, and I hope it's not gonna fall that much more. 'Cause the more it falls, the better the torque ratio, as you know. I would say just noting industry long-term figures, last Christmas, like 1.5% is kind of our peer group, if you exclude the lions of the world, which have these extraordinary growth rates.
If you look at the sort of mainstream, 2%-4% is damn acceptable. Above 4% is really good. We tend to sort of look like that. We came into the year with a lot of optimism. I think when we're sitting in May, a little more guarded, but, you know, we're gonna give it a hell of a go. The risk is you get these surprising reallocations from large asset owners. Now, we're not exposed to one single client in any way, but we have some fairly substantial asset owners or networks we're exposed to. Take the example of a change in management in a large banking group, which is not unusual, by the way.
Mm-hmm.
That means a whole new team comes in. They have a different strategy. You may fit in. It may not even have anything to do with your performance. I think that this is the kind of year we go in when organizations are a bit more fluid, when they look for new and then bold new strategies come, and you can either be a winner or a loser. We don't know the outcome. Obviously, we're doing our best, and given our diversity, we're quite confident that we will find some money. I wouldn't be promising you high torque ratios in this year unless I could signal something in half year.
Okay.
That is very exciting.
Okay. That's great. That's very clear. Maybe the same question on the fee rate. You're at 45.7. I think you've talked in the past about a basis point a year being the attrition, normal attrition rate. Looks like the flows are a bit more skewed to the fixed income side in the 2nd half, and I guess the environment probably suggests that may continue. Do you think one basis point a year is still the right sort of attrition number to-
Yes. We had 1.1%. We had flat 2nd half, actually. We had no pressure. All the pressure was in the 1st half. I think that's still a fair guide.
Just a fair conservative guide, yeah.
Mm.
To work on that sort of number.
Yeah. If the equity book livens up, you could get the other way. It depends whether it livens up with new client relationships or existing ones where you hit the scale. Remember, you contract these fees for some clients, you contract up to GBP 10 billion. Okay? You get the 1st billion, we're all happy at the nice fee.
Mm-hmm. Yeah.
As it grows, the client calls you up and says, "But in my contract, remember the 2.5? And by the way, I've been a loyal client. I've been around for a long time." There's some of that is kind of working out. I would stick to the current one. I wouldn't see it going into a 300 basis points or, for that matter, a sharp rise.
Okay.
Your model is now filled out. Can't give you the talk if I had it. The board asked me yesterday. I told them I don't know. Anything else? Eva.
We've got one question from Jan Meintjes at Denker Capital.
Yeah.
Given that you have reached your stated excess capital level, why would you not pay out 100% of your profits?
Jan wants a dividend there. Anyway, Kim, your answer, Jan.
Why would we not pay? Because I think we will caution on it, and we will also look to see if there's any capital commitments that we may want to look at in the future. It's one of these things that we will, you know, consider. I don't think we'll ever pay out 100%, but we'll look to consider what our dividend ratio will be, our payout ratio will be at the interim and at the final next year. You know, really in consideration with the board at the same time.
Yeah.
I think it's important at this stage to hold, you know, a decent buffer on the balance sheet and also to consider any other commitments we may have.
I think, yeah, the other piece, I think in addition, Jan knows our shareholder very well, who is now distributing the stock. You know, we're out there in a big, rough, old world. Suddenly, we don't know what can happen. The last thing we wanna go and do is an emergency equity issue. Okay. You need a little bit of extra capital just to make sure you navigate and you can pursue growth opportunities when they come. Growth opportunities, not M&A, as Kim said.
Yeah.
It's you know some of the less liquid strategies require some seeding, which we don't traditionally do. We just wanna keep our powder dry. And Jan, we are shareholders like you, so we would love the dividend flow. You know, it's a good thing. We're on your side, but it's just a question of margin of safety.
Conservatism.
Mm-hmm. Eva says done.
Thank you.
No questions. Thank you very much, ladies and gentlemen.
Thank you.
May the year be less volatile than the last quarter.