Good morning, everyone, and welcome to our Q3 Conference Call. As you can imagine, this week is a significant one for Schroders. Peter Harrison steps down as CEO this Friday, and the first thing I want to do today is to pay tribute to his achievements. The business looks very different to where we were in 2016, and its evolution is a testament to Peter's dedication and long-term perspective. Today, our business is diversified by geography, by investment proposition, and by client type. Our breadth and depth, combined with the quality and dedication of our people and our commitment to delivering excellent investment outcomes for our clients, has created strong foundations and significant potential for future growth. I will do what is required to deliver at pace on this potential.
I hope today's statement and this call will give you a sense of how the new team is going to operate. While we won't necessarily do a call every quarter, today feels like a good moment to share our perspectives on Q3 and what we're expecting for the rest of the year. I'll also give you some early insights into our longer-term priorities to generate focused, profitable growth. Let me start by describing my key takeaways from what we're reporting at Q3. Assets under management reached a new high of GBP 777.4 billion, despite an FX headwind of GBP 17 billion. Assets under management, excluding JVs and associates, grew to $663.8 billion, driven by positive flows, markets, and investment performance. Net flows in JVs and associates were negative in the quarter, principally due to continued market volatility in China.
From my perspective, I'm not too worried about the flow picture in JVs and associates. It's worth remembering that these flows are GBP 5.2 billion positive year-to-date, although I suspect we're going to see more volatility in the coming months. Looking in more detail at the asset management segment, I want to start with mutual funds because this is where we saw the best flow performance in the third quarter. Client demand for our fixed income strategies remains really strong, and in equities, the outflow rate has eased over the quarter. By region, this reflects good demand for our emerging markets and U.S. equities, while we continue to see outflows from Asia-Pacific equities driven by China.
It is worth bearing in mind, though, that the magnitude of the mix shift towards fixed income and away from the higher-margin Asia-Pacific equities is likely to have a slight softening impact on the target mutual fund revenue margins of 67 basis points we mentioned at the half-year. Our mutual funds business is a prime example of what I mean about generating focused, profitable growth from strong foundations. We already have world-class strategies and access to clients across multiple channels and across a number of geographies. I want us to play to these strengths. In institutional, flows were stable in Q3, but as we always say, this business can be lumpy. While we have mandates ready to fund in 2025, we already have notified losses from three clients of GBP 2 billion in the fourth quarter.
Moving on to solutions, net outflows have reduced quarter on quarter so far this year, but the reality is that we're going to have to work really hard in the fourth quarter to offset a low-margin notified outflow of around GBP 8 billion from the Scottish Widows mandate. As you know, in solutions, we've built a capability which enables us to engage with U.K. pensions and insurance clients with innovative multi-asset solutions in our public markets offering. What we need to do next is to deploy greater commercial discipline to this business. In private markets, net flows slowed in the third quarter. We knew that given the fundraising environment, particularly in real estate, meeting our GBP 7-10 billion net new business per annum target was going to be a bit of a challenge this year.
Candidly, our focus in Q4 will be on beating last year's net new business of GBP 4.5 billion, partly due to the accelerated outflows that we weren't expecting to see until 2025. We know we can do better on fundraising and on deployment of assets, and I'm looking forward to working closely with the leadership team in Schroders Capital to execute on this as a priority. In wealth management, net flows were strongest in our advised business, reflecting continued momentum in Cazenove Capital, while outflows in the managed business were driven by a single benchmark client choosing to insource. We remain on track to achieve our net new business target of 5%-7% of opening AUM, and wealth clearly remains one of our best opportunities as a group to deploy capital.
Now, we recently demonstrated this in the quarter with a small acquisition of Whitley Asset Management, which extends Cazenove Capital's leading franchise with U.K. ultra-high net worth families, successful business owners, and charities. But a slight note of caution around the wealth net operating revenue margin. The combination of net interest margin reductions linked to interest rate cuts and flows predominantly into gilts means we're likely to be slightly below our H1 revenue margin guidance of 41 basis points. In summary, we continue to meet client demand in the third quarter with positive flows in our operating segments, but we're expecting to encounter some temporary headwinds in Q4. I want to conclude by giving you a sense of what's on my agenda for my first few weeks as CEO.
As I said at the beginning of the call, I see my job being to execute on the potential Peter has created. What do I like best about Schroders? It's the quality of our franchise, our platform, and our client relationships. What do I want to improve? Our focus and execution. I've said that my initial priority is to focus on simplification, commercial discipline, and flawless execution. What that means is that we're going to be thinking really carefully about how and where to build on those strong foundations we already have in place, while redoubling our efforts to attract and retain talented people, maintain cost discipline, return to EPS growth, and deliver shareholder returns, never forgetting the importance of remaining relevant to our clients. People always come first. That's clients and colleagues, and I'm delighted that Meagen Burnett and Johanna Kyrklund are joining me on the board.
Since I joined last year, what has really struck me about Meagen is the rigor she has brought to her role as the Group Chief Operating Officer. She has a keen focus on commercial decision-making, and her knowledge of this business from front to back means she's well placed to drive efficiencies in our processes, particularly leveraging our investments in technology. Meagen will act as the interim CFO until her formal appointment to the board on the 1st of January 2025. But Johanna's elevation to the board, which I'm really excited about, actually is retaining while she's retaining her market and client-facing role as our Group Chief Investment Officer, really underscores the fundamental importance of investment expertise to both our business and to our clients.
A streamlined executive committee will take office on the 8th of November, and our objective from here is to proceed at pace and with clear accountability to move the business forward. We've already made a start on identifying our key priorities, as well as spending time with the new team. I'm also looking forward to meeting clients, shareholders, and other market participants like you. One of the first things the new ExCo will build with even more rigor is a very clear understanding of where within our business we can accelerate our transition to growth. Once we've established this, you can expect us to act decisively to deliver for clients, scale profitably, and grow at pace. With regards to costs, you've heard me say before that we have to save to invest to grow, and this is something we will remain focused on.
Our continued cost discipline in the second half gives me even greater confidence in the non-compensation cost guidance I gave you in August, which we now expect to be in the range of £665 million, and regarding compensation costs, a key priority of mine over the next few months will be to make sure we have the right reward arrangements in place to attract and retain the people we need to take the business forward. I hope this update has given you a clearer picture of what to expect in terms of business performance for the rest of the year and a bit of a sense of our longer-term priorities.
We have a lot of hard work ahead of us to deliver our full potential, but I know the whole team are looking forward to getting stuck in and reporting our progress to you around the time of our full year results in March. For now, I'm happy to take any questions you have on what I've talked about today, with the proviso that, as I said, we have a lot of work to do between now and March before I can provide you with all the answers.
Thanks, Richard. I'll jump straight into questions online. First question is from Nicholas Herman. Nicholas, if you could please come off mute and restate your name and your company.
Yes, good morning. It's Nicholas Herman from Citi. Thank you. Actually, first, I can say thank you for the added disclosure and the quarterly release and the willingness to engage with investors around it. So thank you for that. I guess just three questions from me, if I could. Richard, I appreciate you've only recently taken over as CEO, and thank you for the color on your strategic priorities. You called out simplification and flawless execution, among others, as some of your priorities. And I appreciate you can't provide limited color right now, but detail right now. But which businesses or areas would you say, therefore, are currently overly complex and/or are undershooting on profitability and growth? That's the first one. Secondly, on pipeline, you've called out strong mandates funding 2025.
Is it fair to say that you have better visibility on those than you did when we spoke last in the summer? Hence why you're calling them out. And can you please provide some details on what segments those mandates are in, please? And then finally, private markets, you've acknowledged that you thought it would be challenging to hit the GBP 7-GBP 10 billion flow target this year. With the accelerated outflows that you expected next year and given a gradual uptick in industry activity, are you confident on hitting the GBP 7-GBP 10 next year? Thank you.
Nick, thanks for the questions and acknowledging the fact that we are trying to give you more disclosure and be helpful, so we were listening. Firstly, on the simplification point, if I stand all the way back, we've got an amazing set of businesses here at Schroders, and we have an awful lot of product that we deliver to an awful lot of clients in a lot of markets. And if we really want to drive growth, I want us to make sure that we can focus on those parts of our business where we can really see growth coming through in the future and where we've got great client demand. So I think that notion of simplification starts at the top and runs all the way through all of our businesses.
And that's one of the reasons why we'll have a streamlined executive committee as we go forward from Monday, which is about simplifying but also driving accountability. When I think about the pipeline, the thing I suppose that I've realized in the last year is that when we get notified wins, it always takes quite a long time for anyone to give you any cash, whereas when you get a notified loss, people sort of want their cash back pretty quickly. So what we have got good visibility on now is actually where we have won mandates. We've always had a good visibility of the pipeline of potential wins, but these aren't potential wins. These are absolutely notified wins where we're expecting cash coming in, but we know that won't happen until the first quarter.
And if they'd landed in 2024, I might be having a very different conversation about what the Q4 would look like. So I have that certainty, but of course, as I said, we're not going to see them in the current year. On private markets, sorry, you did ask where they were going, Nick. Sorry, don't want to mislead you. They'll be going into both solutions and into the institutional segments of the business. So when I think about private markets, there are some really great things the business has done in the last year. Be really clear about the differentiation of its product range, actually the clients that we need to sell to, developing new and innovative products. That's all great positioning for the business. But as I said, we have to do better, and that is a priority for me and the team as we move forward.
One of the things we will be looking at is what we think the right level of targets are for this business going forward. So I'm not saying we've got the wrong targets, but that's one of the things that I want to be really clear on over the next weeks and months, and we'll include an update on that when we come back to you in March.
Thank you.
Next question is from David McCann. David, if you could please come off mute and restate your name and your company.
Thank you. So yeah, two from me, please. It's David McCann from Deutsche Numis. So firstly, can you give us a sense of how much of that Scottish Widows mandate is now left? I think it was about GBP 75 billion when it came on. Obviously, there's been a couple of larger losses either that come through or have been notified now. So kind of what's left? And indeed, what further risks do you see to that bit that's remaining? And then sort of more broadly on that topic, I mean, is there anything we should read into these mandate losses from Lloyds? And in particular, what it might mean to your relationship with Lloyds? Noting, obviously, you do have that JV with Lloyds in wealth management as well. Thank you.
So let's just unpack the Scottish Widows point, David. And it's a great question. So as you say, we started off with a slightly bigger mandate than we have today. And that mandate, because of the backbook portion of those assets, runs off at a normal annualized rate of between GBP 2 billion and GBP 3 billion.
And what we've seen in the current year are two adjustments. One in the first half as a result of the sale of the bulk annuities business, and here in the second half, a situation where they've taken a quant portfolio and actually moved that into a passive style investment. So they're episodic events. So what you should really be thinking about is that we normally have that GBP 2 billion -GBP 3 billion runoff in the portfolio on an ongoing basis. But we have about GBP 60 billion of assets left in that mandate today.
David, I'm sorry, I forgot your second question.
Yeah, the second question was really, should we read anything from those mandate losses with Lloyds into the broader relationship with Lloyds, in particular thinking about your JV in the wealth business?
Yeah, sorry about that. That was the most important question for me to answer for you, really. No, you shouldn't read anything into it. We, again, knew these things would happen. It's all about timing when they would happen. We have a good relationship with the leadership of Scottish Widows in particular, but also with Lloyds. You know we have both the joint venture with Schroders Personal Wealth with them, and they're an investor in our Cazenove business, a very important introducer of business to us through both of those channels. And I think the relationship remains pretty strong.
Thanks, David. Next question is from Arnaud Giblat. Arnaud, could you please come off mute, restate your name and your company?
Hi, it's Arnaud Giblat from BNP Paribas Exane. I've got three questions, please, or three follow-ups. On costs, I was wondering, thank you for reconfirming your target for this year. I'm just wondering, more broadly given the challenges the industry is facing and you're seeing some challenges yourself, I'm wondering if you are thinking about any potential opportunities to right-size your cost base as some of your peers have done. My second question is on private markets. Thanks for the update there. I'm wondering if there are any fund launches you could talk about, any pipeline of business. That could be quite helpful. I mean, obviously, some businesses go through a fundraising process, so just wondering if there's any color to give there. And finally, on the outflows you've indicated for the fourth quarter, these are quite large in size.
Could you talk a bit about the margins at which they're coming off at? Thank you.
Thanks. So on costs, as I reflected, it's really important that we go back to EPS growth, right? And we have to do that through two levers: growing the revenue base and managing the cost base down. What I don't think we can do is an exercise in shrinking ourselves to greatness by taking costs out, because I actually really believe in the potential of this business. So what we are doing as an executive team going forward is thinking quite thoughtfully about what we need to bring that potential to life and at the same time drive greater shareholder return. And look, we'll be giving you more information on that as we get into March, but absolutely understand that that is really top of mind for all of us as we go into the new year. On private markets, we've got lots of people at fundraising.
There are some fund launches. I'm hoping we get a European fund in Schroders Greencoat launch before the end of the year, so as you'd expect, there are normal fundraisings that you'd expect in any private markets business. I don't think they're going to give us a lot of assets as we go into the final stretch of this year, but I think they're positioning as well for 2025. And that's going to be an area, as I said, that I'm focused on with the Schroders Capital management team, so I don't comment, really, and I don't think the organization ever has done on the actual specific margins associated with individual client mandates. But what I can say is that all of those mandates that we are losing are slightly at the lower end of our margin range, not at the up end.
One slight reflection for you might be that two of those mandates actually have performance fees associated with them that we're expecting. Now, you'll remember I told you at the half year that I thought GBP 75 million of anticipated performance fees could be a bit of a stretch, partly because of those mandate outflows and because we still haven't got, in all cases, above high watermark levels. I would be thinking that's closer to the GBP 50 million range as I come into the land of the year end.
Thanks, Arno. Please go back on mute and lower your hand. The next question is from Hubert Lam. Hubert, please come off mute and restate your name and your company.
Hi, it's Hubert Lam from Bank of America. Thank you for taking my questions. I congratulate, Richard, on your new role, and also thank you for the new disclosure. I've got three questions. Firstly, you mentioned some notified wins in the pipeline for next year. Can you quantify how big the pipeline is and into which categories the wins are into? The second question is on the institutional outflows for Q4. What were the reasons behind that? Is it just a switch into passives or institutions internalizing some of the management? And do you see this trend going forward as well? And lastly, you mentioned costs around the non-comp for this year. Can you talk about what you expect for the comp revenue ratio? I think at H1, you talked about 46% comp revenue, or you're targeting around that.
Is that harder to hit now, just given the market environment? Thank you.
Thanks, Hubert. And I appreciate the sentiment about taking over. And also, I'm really liking the fact that people are noticing that we're trying to be a little bit more transparent with you. So I really appreciate that. Thank you. So on the notified wins, all I think I'm going to tell you, Hubert, is that they would more than have offset the losses that we are anticipating in the fourth quarter if they'd landed in the fourth quarter. So that's why I wanted to note them, because if they'd all landed in the same sequence, we wouldn't have had this disruption. So we feel pretty good that they're starting us off in the institutional line and in solutions in a better state in 2025. Those institutional outflows are predominantly a move to passive, actually.
Now, you know the problem, of course, is when people move to passive, it's always quite hard to entice them back into active at a later date. But it isn't an issue, really, of performance or a broader systemic issue across the book. They're very specific cases in each of the three individual mandate cases. And we've tried really hard on costs from a non-compensation perspective. So that's why we've managed to get you down to GBP 665 for the current year. On non-comp, I'm not changing the guidance I gave you at the half year of 46% for the comp to revenue ratio. I'm watching that quite carefully. There's a long way to go before the end of the year. We have to see how the U.S. election impacts markets over the coming weeks. And so anything could happen to affect rates and market rates.
But the current aim is that we stick at 46%, sorry, 46 as a ratio. And I am very keen, though, that we have enough firepower to keep the really important people who are going to drive our business forward in the business at the end of the year.
Thanks. Sorry, just to clarify, you're saying the wins in next year, are they mainly solutions, or are they both solutions and institutional?
They're both Solutions and Institutional.
Great. Thank you.
We've got a question from Angeliki Bairaktari. Angeliki, if you could please come off mute and restate your name and your company.
Good morning. It's Angeliki Bairaktari from J.P. Morgan. Thank you very much. And congratulations from me as well, Richard. And thank you for the net flow disclosure. So a couple of questions. First of all, on performance fees on your guidance of around GBP 50 million, I think you had some realizations from Schroders Capital in the second half of this year already. So I was just wondering what we should be expecting for carry and whether those realizations play any role or whether they were already reflected in the carry numbers in prior periods. Secondly, with regards to the compensation costs, I mean, if I look at your H1 number, comp was down 2% year on year.
And I think if I look at consensus for the full year, it implies that comp in the second half is actually going to be much higher relative to H1 and also relative to last year. Is that, do you think, a fair assessment, or could we see some improvement there in terms of the comp for the second half along the lines of what we saw in the first half? And third question, with regards to the U.K. budget, I mean, there were quite a few measures there, like capital gains tax and also inheritance tax on pensions. Can you let us know what is the initial reaction within the wealth division around the impact that the budget could have on net flows for next year? Thank you.
Thanks, Angeliki. It's great to hear from you. So on the GBP 50 million performance fee and carry guidance I've just given you, that would include all of what we're expecting from all of our asset management business. And the realizations that you talk about have pretty much already been factored into the results. So I've written down your second question. I'm not doing very well today. I can't read my own scribbles. Angeliki, just remind me of the second question.
Yeah, sure. No problem. H2 compensation costs, given that H1 was down year on year.
Yeah. Sorry, I'd written compensation, but I couldn't actually read my own scroll, so I'm sorry about that. So as I said, 46% comp to revenue ratio, I think, will actually show us down year on year from a compensation perspective. We're managing the headcount quite tightly. And what you will have seen from the benefit in the first half of the year is that we had some heads that had come out because of the restructuring that we took a charge for in 2023. But actually, because this is a straightforward percentage of revenue that we take to the compensation line, it's really just reflecting the different phasing of revenue across the year. On the budget, I have to say, I'm delighted by Rachel Reeves because she's made the whole world slightly more complicated for people.
That, we think, is going to help us drive advice across all of our wealth businesses. That's a great opportunity for us. There are some other things maybe for us to factor in. Like all wealth managers, we saw quite a lot of bed and breakfasting going on running up to the budget so that people were worried about the change in the capital gains tax rate. That is likely to have a marginal impact on tax payments in January and therefore how people realize some of their investments. We will also undoubtedly see, as a result of some of that advice going forward through 25 and beyond, people thinking, certainly our older clients, thinking about how they look at their SIPs now that the inheritance tax shield has been taken away and whether there is cash taken out of those.
So I think there are some longer-term implications. But in the short term, I think what she's really done is increase the need for wealthy clients to take advice on their portfolios.
Thank you very much.
That's it for questions.
Great. Thank you very much, everyone. I appreciate you taking the time to join us today. I'm looking forward to the first day in the new role on Monday, and I look forward to seeing you all, no doubt, before we get to the end of the year. Take care.