Good morning, everybody, and welcome to the Schroders H1 results 2022. We're gonna do the normal format. I'm gonna go through flows. Rich will come back and talk about financials. Then we'll open up for Q&A and outlook, if it's okay. Let's start with the headline numbers. Operating revenue up 3%, operating profit up 2%, assets under management up 5%. New business up GBP 8.4 billion. I'll come and obviously give you the breakdown of that, and the dividend at 37 pence, which is flat on the prior period. I think for my part, there's quite a lot going on in these numbers and some more transparency, which I think is really important.
As we move more towards a platform business, we're keen to give you much more transparency as to all the moving parts. We're gonna unpack that in perhaps a little bit more detail than normal. First of all, let's start at the high- level AUM bridge, just because obviously a lot going on in markets. That actually was a GBP 87 billion negative impact on assets under management, but offset by GBP 34 billion of FX. Acquisitions was GBP 52 billion, and so AUM actually ended the period at a new high. The AUM growth obviously was you know a lot, a big chunk of acquisitions and obviously some new business. Let's get into the flows.
Of that GBP 8.4 billion, it splits across a number of the really important channels, and actually almost GBP 15 billion of it was into the areas that we've talked about in the past as strategically important to us. Of the GBP 8.4 billion, GBP 4 billion was into JVs and associates, GBP 3.8 billion was into wealth, GBP 6.1 billion into the solutions business, and our mutual fund business saw GBP 2.8 billion of outflows. The institutional business, which I'll come and unpack in a little bit more detail, had GBP 7.1 billion of outflows. Investment performance remains strong, 77% over three years, 79% over five years. The one-year number dips given market rotation, down to 52%. We will.
In my mind, the performance we've got in our mutual funds was the standout of those numbers, albeit that the overall number was a negative. I'll come and talk more about that in just a moment. If we look, break the numbers down by asset class, positive flows into private assets and multi-asset, multi-asset particularly driven by our solutions business. Equities saw just GBP 2.6 billion out, which considering the markets are down 20%, we regard it as a very resilient outcome. Fixed income, at GBP 6.1 billion of outflow. Broadly speaking, that was sort of four and a half billion, four billion of one mandate. European credit obviously receiving quite a lot of outflows given market sentiment.
By region, UK was a standout performance both in mutual funds, in solutions, and institutional. Latin America saw net inflows despite Chilean pension funds giving the all clear to withdraw. We actually saw positive flows overall. Asia was impacted by that one-off outflow I mentioned in Japan. But pleasingly, we saw positive inflows in Australia, which I know has been a theme of these meetings in the past. US saw GBP 3.3 billion of outflows, but positive on the mutual fund side, which I'll come back to, and negative on institutional. And EMEA GBP 2.8 billion, which was really the mutual fund flows, which I'll come again and talk about in some more detail.
That picture, to my mind overall, was surprisingly resilient given the market backdrop and given some of the industry data that we've seen in terms of the aggregate surveys about flows. Let's just get into mutual funds, because I think that's an important driver. We actually saw positive flows, despite the IA, of course, in the second worst quarter on record. We saw positive flows overall in mutual funds in the UK, and we saw positive flows in North America. I think if you looked at all North American mutual fund complexes, I think you'd find that this is second percentile performance, so right at the top in terms of resilience. Singapore was a standout performer in APAC, but clearly you know a little bit of rotation there.
I think again, a pleasing result just to see GBP 0.4 billion out in that environment. EMEA, the key determinants of that were Italy, Germany and Spain. The normal suspects when you see big market drawdowns, you get flows out. Actually that flow is no worse than the inflows that we saw H1 of last year. Actually, to my mind, was a much better performance again than I might have expected given the way markets are behaving. Just in terms of the institutional side of the business, I said there was GBP 7.1 billion of outflows. To put that in context, big outflow in APAC in Japan of nigh on GBP 4 billion.
There was one mandate in North America, which was a dominant part of that GBP 2.8 billion, which frustratingly, we are one of two managers in a fund for client, which has seen significant outflows. The fund has seen significant outflows. We've actually outperformed, but the other manager in that area has underperformed, and we've seen assets go despite actually putting on good investment performance, which is kind of the nature of the business. Two lumpy numbers which frustrate me because they've taken the gloss off what was otherwise, a—from our perspective, a good performance. Now, I wanna dig more into why mutual fund performance was so resilient. I think for me, this issue on sustainability has become really, really important.
If you look at where the flows are going in this sector, you're seeing. We always talk about net flows, but if you just took the gross picture overall, you're seeing very significant move out of, effectively, the traditional old non-sustainable world into either thematic funds or new sustainable funds. The way we've repositioned our product range has meant that , actually in mutual funds, we saw GBP 0.6 billion into equities, GBP 3.1 billion out of fixed income, but GBP 0.6 billion into equities. At a time, really, when you would've said you're gonna see very significant equity outflows. This is all around, we've our SustainEx product has become, I think, recognized as the industry-leading tool for measuring its sustainability impact for public companies.
Our Engagement Blueprint has won an award for sustainable engagement with businesses. We've got a very strong brand emerging across a number of these areas. I think that, we often talk about sustainability, but the impact on the business of sustainability is becoming important. W e've had on this chart for many years the fact that we're AA A rating from MSCI, and our Sustainalytics rating is very much top quintile. The bit that's driving it is that ability to engage with companies and engage with clients. A lot going on there. I'll come back and talk about Greencoat in just a minute. We made three acquisitions that we announced last year. All of them have now closed. All of them will be with River and Mercantile closed in January with Greencoat closed in April.
The full effect of those being seen in net new business, which is the GBP 52 billion number. I think the point I'd make on the River and Mercantile business is normally when you close an acquisition like that, you expect, to be put on hold for consultants for a year, two years, three years. We've won, on average one and a half mandates per week since that new business closed. Now, not many of those haven't yet funded, but we've won one and a half mandates per week. I think it's a reflection of the strategic value of that business that people have said, we're delighted that Schroders is in there. We think that the integration is gonna be a great success, and the product proposition is spot on.
The River and Mercantile business already earning its trust. Greencoat, you need a bit of luck sometimes, but to buy a renewable energy business just before an energy crisis has been really valuable. We've opened up in three European countries during the first half of the year. It's already, despite the acquisition, generated another GBP half billion of net new business. Clearly we've got strong plans for that. The amount of capital which is gonna be allocated to building more renewable power is clearly going up. The opportunities to extend the capabilities beyond wind, solar, biomass, et cetera, into batteries and hydrogen is obviously very significant. Over time, there's much more we can do with Greencoat.
Cairn, as we've said before, just builds out our real estate franchise, so we've now got every European area covered. What that does mean for our private assets franchise is we've now got the four core pillars that we've been building towards. Private equity column, a private debt column, an infrastructure column, and a real estate column. All of them capable of standing alone, but more importantly, being able to build solutions across all of those businesses. T here's three well-known archetypes in this area of StepStone, Hamilton Lane and Partners Group. We positioned our business to be able to offer solutions across all of those, and particularly play in the democratization of private assets, which we see as a very big trend still to come. Private assets build out, we think is now complete.
There'll always be little bits more we can do, but there's a lot of organic investment going into new private debt teams, et cetera, which we're building out at the moment. A lot of work's gone in there. It was pleasing to see the flows continue to come through. We said last time that we had GBP 2.5 billion of dry powder, which we hadn't invested. That number has gone up now to GBP 3.8 billion of dry powder that we've got, which isn't recognized in our AUM because it's not yet fee earning. But in aggregate, this business is now just shy of GBP 70 billion. Importantly from a revenue perspective, our solutions business and our private assets business are now larger than our institutional business.
That transformation of the group into areas of fast-flowing water, I think is you know, we're crossing the valley and avoiding those headwinds and finding these rapidly growing businesses starting to become the largest part of the business. I've mentioned solutions, but there's GBP 6.3 billion in there. We announced two important new wins in the H1 . One was Centrica and the other was Lloyd's of London. There's a lot more we can do with Lloyd's of London. We're just literally in the foothills of that agreement. I think there's, again, it shows the power of the franchise to start winning these really big mandates where there is a lot to do.
Frankly, the number of firms we compete with is really very small indeed, because just no one else has the combination of systems, actuarial knowledge, and breadth of product to meet those needs. We wouldn't have won the Lloyd's mandate without the private assets capabilities that we're able to offer on the other side. Wealth management was pleasing. Now, I said Richard's gonna come and break down the numbers and give you more granularity in a moment. What we've done is we've taken. We wanted to do something which gave you the ability to understand the platform nature of this business. We've broken out our advice business, our platform business, and our managed business, and are reporting those separately.
Our advice business saw GBP 3 billion of inflows, our platform business saw GBP 0.5 billion of inflows, and our managed business saw GBP 300 million of inflows. It does mean that the aggregate AUM is higher, but where we've got a separate contract which is independent, we recognize it independently. Had we reported wealth AUM on the old basis, we would have recorded GBP 3.2 billion. There's an element of change in that. I think underlying, we saw much stronger flows than I thought we may see given the market environment. We also feel that the 5% target that we set is achievable even on this higher AUM base. That's an important base, important number for the future. Finally, JVs and associates were again a positive number.
Overall, GBP 4 billion of inflows, positive flows in SPW, and across China and India. A quick whirlwind tour. I'll let Richard get into detail, and I'll come back and talk more about the underlying outlook for next year.
Thank you, Peter. Before I get into the detail of the results, I just thought I'd spend a few minutes talking about the presentational changes we've made. As our business has grown and become more diverse, there are more moving parts, as Peter said. This has led to us making some improvements that provide you a better understanding in terms of our underlying performance. We've also listened to your feedback and are confident that new presentation represents a real improvement. Let me summarize the three changes. The first is to provide more transparency of our wealth business, as Peter's just alluded to. The second is to no longer proportionally consolidate SPW within our wealth segment. The third is the representation of the income statement. I'll begin with the first of these, relating to the analysis of our wealth business.
You'll remember that in 2019, we broke down the asset management segment into business areas to help you better understand our strategy. We're now breaking down our wealth segment to help you further understand the components of that business. The breakdown aligns with how we described the business at our Autumn Investor Day . We are analyzing the business into three core services, as Peter just said, that we provide to our clients, namely financial advice, platform services and investment management. One of the key features of our wealth business is the ability to provide several services to the same client. These sub-services are subject to distinct sales efforts and agreements. Previously, the value and the growth of these successful efforts was not visible as it was wrapped up in our revenue margins.
We are now separately reporting AUM and flows for each of the services we provide, along with the associated fee margin, thereby helping the accuracy of your modeling. To enable this change, we have restated our opening AUM for the wealth business to GBP 102 billion, with the increase driven by the separate recognition of the different contracts we have with our clients. This new approach also provides you with more insights into our solutions business. As we grow our fiduciary and OCIO services following the acquisition of R&M, we will increasingly provide a combination of advisory, LDI and investment management services to the same client. It will be important for you to understand the value that each generate. Moving on to the second change, which I'm sure you will like.
Given we are providing additional information on advised platforms and managed services, we can simplify our treatment of SPW. The AUM of this business will now be included within associates and joint ventures, and we will no longer be proportionally consolidating the revenues and costs in our segmental reporting. I know that has caused a fair degree of irritation among many of the analysts. Moving on to the third and final change. We are no longer reporting profit before tax and exceptional items. Instead, we are now presenting operating profit along with profit before tax, which of course is unchanged. This is much more consistent with other asset managers. We have included a reconciliation between the two formats in the press release and data pack.
By focusing on operating profit, we can provide you with the clarity of our performance on the engines that drive the group's results, namely asset management and wealth management. We are providing a clear breakdown of items that are not part of these operating businesses below operating profit, but before profit before tax. These comprise, firstly, central costs. These are the expenses related to the group's treasury, corporate development, governance and corporate management activities. Secondly, acquisition-related costs and the amortization of acquired intangible assets. Finally, the net gains and financial instruments managed within our group treasury, including seed capital. This new presentation will make it easier to understand the drivers of our performance and importantly, our underlying business. That's a summary of the presentational changes you'll see. Moving on to the results. Key feature of H1 was the challenging market environment.
Despite this backdrop, the net operating income from our business segments increased 3% to GBP 1.2 billion. Our operating expense ratio was consistent with H1 2021 at 67%. I note a few of you this morning have commented that our total cost ratio has deteriorated on the old basis. This is not the best measure of operational efficiency. If you want to include central costs in our operating expense ratio, it has actually marginally improved to 69%. Operating profits from our asset management and wealth management segments increased by 2% to GBP 407 million. That's a resilient performance that reflects the strength of our diversified business model. However, our balance sheet returns were impacted by the fall in asset values. As a result, profit before tax reduced to GBP 313 million.
Turning to net income, you can see the movements that have contributed to the 3% increase on the slide. While the combination of markets, FX, and mix led to a reduction in net income of GBP 48 million, it is broadly offset by contribution of GBP 46 million from net new business. This includes the tailwind from the strong flows we generated in 2021. Going into the second half of the year, there's still a tailwind. This is now GBP 8 million, although this is gonna be more than offset by the current impact of markets. We will, however, benefit further from the acquisitions we have completed this year. These contributed an additional GBP 37 million of income in H1. Our net income from performance fees and carry fell to GBP 21.5 million.
This is due to the high watermarks we achieved in the past and the challenging market conditions that have impacted asset values in H1. At the start of the year, we guided to GBP 70 million in performance fees and carry. In a year like 2022, these will be lower, possibly around GBP 50 million. As ever, it's always really difficult to predict these midway through the year. I want to highlight that excluding the volatility of performance fees and carry, our underlying net operating revenues grew by around 5%, representing strong growth in the context of the market environment. Let's now look at how these revenues break down by business area, starting with the asset management segment. In private assets, as Peter said, we generated good flows and completed the acquisitions of Greencoat and Cairn.
These factors helped management fees increase by 27% compared to the first six months of 2021. Our real estate team also successfully completed a number of property deals, earning transaction fees of GBP 9 million. Excluding performance fees and carry interest, our net operating revenue margin was in line with my guidance of 62 basis points. We expect the margin to remain at this level for the full- year. Next, our solutions business. As you know, we completed the acquisition of the solutions division of River and Mercantile, and we have had some significant client wins, as Peter mentioned earlier. As a result, average AUM increased to GBP 223 billion, helping net operating revenue increase by 12% to GBP 147 million. We had a net operating revenue margin of 13 basis points.
That's in line with my guidance for the full- year, and we expect this to remain stable for the remainder of the year. Overall, across these two strategic growth areas within the asset management segment, we have achieved good underlying growth. This has enabled us to weather the broader market challenges that have had more of an impact on mutual funds and institutional business. However, relative to the wider industry, our mutual funds performed well. Our average AUM was broadly flat compared to the same period in 2021. Management fees, however, reduced by 6% to GBP 379 million due to the impact that the falling markets has on the mix of our AUM. Lower equity values means the proportion of our AUM earning higher fees reduces. As a result, our net operating revenue margin, excluding performance fees, fell to 70 basis points.
We expect the margin to stay at this level for the rest of the year. Finally, to our institutional business. Average AUM reduced by 5% to GBP 155 billion compared to the H1 2021. Management fees were broadly flat, reflecting an increase in the revenue margin. This increased to 32 basis points, principally due to the loss of the two lower margin institutional clients Peter referred to earlier. We expect the benefit of this to continue over the rest of the year through the higher margin. Now moving on to the wealth management segment. As a reminder of what I said about the new reporting, we are no longer proportionally consolidating revenues and costs of SPW within the wealth segment, so our figures today now exclude this. We have represented the comparative information accordingly. Moving on to the numbers.
Overall, the wealth management business continues to show good growth and is on track to achieve the 5% NMB target that we set out in the Investor Day earlier this year. As Peter said, let me reemphasize that this revision upwards, in effect, this is a revision upwards because we represented our AUM, so there's more AUM, so 5% growth on a higher number is more growth. Average AUM grew to GBP 99 billion, helping management fees increase to GBP 160 million, up 8% compared to the same period last year. The rise in interest rates has also had a positive impact, helping our net banking interest more than double to GBP 13 million. This is now included in our net operating revenue margin, which excluding performance fees increased 2 basis points to 40 basis points on a like-for-like basis.
Now let me break this down into the individual components of financial advice, platform services, and investment management. Our financial advice business generated strong growth with average AUM increasing by 8% to GBP 60 billion. This helped drive a 12% increase in revenues to GBP 159 million, with a net operating revenue margin of 53 basis points, up 3 basis points due to the higher net banking interest. We expect the margin to stay at this level for the full year. Average AUM for our platform assets increased by 7% compared to the H1 2021. Revenues increased by 3% to just over GBP 13 million. While the net operating revenue margin was broadly flat at around 15 basis points. Again, we expect it to stay at 15 basis points for the rest of the year.
Finally, the revenues we earn from providing investment management services to our wealth clients increased 5% to GBP 22 million. Revenue margins were 21 basis points down a bit from 2021, principally due to the impact of markets and a shift to more defensive strategies. We expect the margin to stay around this level for the full- year. Putting it all together, that's a good performance across the three wealth services. Moving on to the returns from associates and JVs, which is the final component of net operating income I want to talk you through. Overall, AUM across all our associates and JVs increased by 4% to GBP 136 billion, and they contributed 16% of the group's profit after tax. This underlines the importance of these ventures to the group as a whole.
Within our wealth management segment, SPW continued the sales momentum of 2021 and contributed GBP 3.2 billion to profits. Within asset management, our existing venture with BOCOM continued to grow its AUM despite the market conditions and the ongoing impact of COVID-19 in the region. Management fees grew by 15%, although we saw a shift away from equity products. Our share profit from the venture reduced by 8% due to lower performance fees and slightly higher operating expenses. We expect these expenses to return closer to historic levels for the year as a whole. For summing up on net operating income. Overall, we earned GBP 1.24 billion, an increase of 3% compared to 2021. Now moving on to operating expenses. As I explained earlier, our new presentation focuses on the profits of our operating segments.
Within this, operating expenses were GBP 833 million. That represents an operating expense ratio of 67%, which is in line with the prior period. We had central costs of GBP 23 million, which meant total costs of GBP 857 million. This includes compensation costs, which we continue to accrue at 45% of our old measure of net income, in line with the guidance I gave you in March. As always, bonuses will be finalized later in the year based on market conditions. For the full year, I expect our total non-comp costs to be around GBP 628 million. That's GBP 8 million higher than the guidance I gave at the start of the year due to FX. Remember, we get a higher benefit from FX to our income, so the net FX impact is positive overall.
This guidance includes the non-comp cost presented in the central cost line. We expect our total central cost to be around GBP 45 million for the full- year. That covers all the main drivers behind the increase in our operating profit for the half year. I now turn to the other items that impact profit before tax. Earlier, I talked about the impact of markets on our operating income. They also had a significant effect on our net gains and financial instruments. In the H1 , we had a loss of GBP 35 million compared to a gain of GBP 33 million in the same period of 2021. Our acquisition-related costs, which were previously included within exceptional items, increased to GBP 13 million due to the acquisitions we completed. Finally, the charge for amortization of acquired intangibles was GBP 24 million.
We expect this to be around GBP 50 million for the full year. Now an update on our capital position. As you know, we've been making our balance sheet work harder. The acquisitions we completed over the year reduced surplus capital by around GBP 770 million. After allowing for other movements, including regulatory changes, our capital surplus at the end of June was GBP 622 million. To summarize, our operating profit for the first half of the year was GBP 407 million, an increase of around 2% compared to the same period in 2021. After taking account of items managed outside of the business segments, our profit before tax was GBP 313 million. Our effective tax rate was 17.4%. We expect this to stay broadly flat for the full- year.
This resulted in profit after tax of GBP 258 million. In light of these results, we declared an unchanged interim dividend of 37 pence per share. Overall, and given the current market backdrop, these results demonstrate the resilience of our diversified business. Now back to Peter.
Thank you, Richard. One of the joys of speaking unscripted is sometimes you get a number wrong. If anybody who wrote down the number that said our outflows from fixed income mutual funds was GBP 3.1 billion, I'm afraid it was GBP 3.6 billion. The inflow number was right at GBP 0.6 billion. Apologies for that. Let's talk quickly about the outlook and then go into Q&A. I'm not gonna try and predict markets for the rest of the year, as Richard's already said, we are clearly starting the second half with markets lower than the first half of the year. The growth plans that we've got for those areas of fast flowing water in solutions, wealth, private assets. The growth targets, we've said GBP 7 billion- GBP 10 billion of private assets flows.
We're gonna stand behind those because we think those will be achieved in the H2 . The wealth growth target of 5%, we think will be achieved on a higher asset base. We do believe that the changes we've made around sustainability and the making of our mutual fund range fit for purpose will put us in a good position. Solutions, again, we see a reasonable backlog. There's clearly a lot of uncertainty in markets, and that's what it will be. The things that we're able to control, we see that there are still opportunities out there.
There's probably one area that I didn't touch on in the main presentation, the announcement we made yesterday, of a joint venture with a company with an NGO Conservation International called Akaria Natural Capital. Now, Akaria Natural Capital is a move by us into natural capital. We believe there's gonna be a very significant change as more people focus on COP27, biodiversity and what changes we can make to nature. We think that more and more pension funds will want to put a chunk of their investments into this area. By partnering with Conservation International into a new joint venture company, there's an opportunity to do a lot more in that area.
We didn't put it in the presentation, but I think it from an outlook perspective, it's gonna be an important part of how we move the dial and help that transition growth. Because without getting nature right, there is no transition to net zero. I'll stop there. Probably we'll do questions in the room to start with, and then we'll go online. If you could state your name and firm for the record, that'd be great.
Thanks. It's Hubert Lam from Bank of America. I have three questions, if I may. First question is on the new China wealth management business. I know that you spoke about that during the presentation. Just wondering how progress has been like since it started at the end of the period, any flows that contributed to your numbers this half year, and any change in terms of guidance, just given what you've seen so far. Second question is on SPW. Again, can you give us any sense in terms of progress you've made so far in the half year? I saw that profits went down year-on-year. Any explanation for that or just market driven? If so, any clarity on that would be great. Lastly, on capital surplus, it saw this fall down to GBP 622 million.
I know that's still a big, a good number, but it's low versus what you've seen historically. I'm just wondering where you feel that should go to until you start looking at acquisitions again. Thank you.
Thanks. Thanks, Hubert. Let me kick off on the WMC. We recorded GBP 400 million of net flows, which are in the institutional segment for the China WMC. This was probably less than we expected. The reason for that was very simple, that we launched the business pretty well the first day of Shanghai lockdown. We ended up with a lot of people sleeping in the office for a very long period of time. Being able to get on the road and really present those funds, we didn't see that follow through. As lockdowns ease, you know, clearly we would expect the underlying rate of flow to be stronger for that.
It's too early to know 'cause it's literally a brand new business, but it was GBP 0.4 billion in the first half of flows. SPW, I saw Lloyds yesterday announce that a 17% increase in referrals. The metabolic rate of that business is growing strongly. If you remember, there was a profit margin guarantee for the first three years of the business. That dropped off last year. That shift is not underlying. The underlying profits of the business have been growing strongly. I think there's been a lot of wood to chop to make sure that the referrals flow through well and the conversion rate of those referrals goes up.
I've been really pleased with the rate of transition that the business is making into making the most of the referrals that come from Lloyds. Making sure, A, they're high quality referrals, and B, the advisors make the most of them. Long way to go, but it's really good to see. The profit number is not a reflection of the underlying business because of the profit margin guarantee. Richard, do you want to talk about capital?
Yeah. Hubert, you referenced GBP 622 million, which is where it is today. That, you're right, that is weaker than it's been for some time. At the same time, we entered the period with a capital number of just over GBP 1.4 billion, which was an all-time high. We've always talked about having about a billion gives us optionality for M&A. Anywhere between GBP 600 million and GBP 1 billion, we feel very comfortable with. Clearly, when it got to GBP 1.4 billion at year-end, we knew that we were going to be de-deploying that because we had announced those three transactions. On the assumption that we have successful EGM vote on enfranchisement, we will also have in our capital armory the ability to do share buybacks going forward.
That's another mechanism to manage that surplus capital to an appropriate level. But I wouldn't expect it to be significantly above GBP 1 billion, unless there was some M&A that we are anticipating in the future.
Questions.
Thanks. It's Bruce Hamilton, Morgan Stanley. Thanks very much for the presentation. Maybe first question on the mutual fund business. Clearly, you've had quite a lot of success with the kind of move to thematics and a range of thematic products. How do you see kind of client interest evolving? Obviously, some themes have been impacted by factors, and so maybe, you know, that changes a little. Is your, you know, confidence in that part of the business still as strong as it was? Secondly, on the minority interest you take in or JV in Forteus, I guess that's quite interesting given the opportunity that gives to help personalize-
Portfolios for wealth clients, including both privates and publics. How quickly do you think tokenization will really, take hold? Maybe, you know, if you cast five years forward, what do you think your sort of affluent client allocations might move to in terms of their private market allocation? Linked to that, will you be tokenizing your own private market funds as part of that process? I'll maybe stop there. Thanks.
Thanks. Thanks, Bruce. I thought that was seven questions, and now I think I count eight. No. First of all, on mutual funds, what's the client interest in. I think there's been a fundamental change in that market, particularly in the wealth sector. The notion of building blocks has changed completely. More people have moved to a passive core and then putting, if you like, thematic funds around the edge. And if they're going to have country exposure, many of the European distributors have defaulted to it must be Article 8 and Article 9. Effectively, you've got stranded assets in Article 6, where you're not gonna see new flow.
Unless you've got a really well-built out range of Article 8 and 9 funds, then that you're not gonna participate. But thematics is a really important part of that, and I think the ability to keep innovating in that area will be a feature of the future. I don't think we're gonna go back to the old country view to a great extent. I mean, clearly, you know, allocations to gems will stay, allocations to global will stay, but really the rest of it will be much more thematic going forward. I didn't mention the Forge acquisition, but for those of you who didn't see it, we've taken a stake in a digital assets business really to drive thinking about tokenization.
The thinking is this: that mutual fund technology is probably now 100 years old, certainly 80- 90 years old. Investment trust technology, the first one was founded in 1871 or something, so that's 150 years old. We're sort of due something a bit more modern, and that I think I'm sure is gonna be a tokenized form. Effectively, you have in your e-wallet, you have a range of assets which, you know, can be personalized to you, and they can be tokenized funds, or they can be tokenized private markets exposure. Probably in the future it will be much more blend of both public and private. Certainly our view is that in order to be competitive, you're gonna have to have both in your thing.
You're gonna have a slice of a wind farm, a slice of another piece of infrastructure, a slice of real estate, or maybe even a slice of a specific property alongside your thematic baskets or whatever. How quickly it happens is slightly anyone's guess at the moment. If you look in the States as a lead indicator, really mutual funds are only now bought by boomers. You know? The next generation is direct indexing. It's separately managed accounts. It's ETFs. I think that mindset is shifting. I think if we're to get proper engagement from investors in terms of what it is they own, they're gonna want to be able to relate to the asset a lot more.
I mean, you know, one of the issues we've got today is that savings behaviors are distorted by the fact that people feel a long way from the underlying assets. More people own crypto than own shares in UK companies. T he reason why buy to let is so big. If we're able to make these other assets readily acquirable and easily understood and accessible through tokenization, it'll be transformative. There's a lot of regulatory wood to chop as well. That's undoubtedly the case. It's interesting to see the Swiss, Singaporeans moving ahead strongly. I think you're gonna see allocations of private assets continue to rise in private portfolios.
Already, if you look in the big wealth channels, it's growing very strongly, you know, at the top end, and regulators will increasingly enable that to happen. Remember the number of public companies, it's pretty well halved over the last 30 years or so. The antidote to that is to be able to make these other assets available. If we're gonna build these new industries, they're probably gonna be in private markets, not public. I'm probably a little bit biased on that, but I see there's a long way to travel, and we'll see allocations rise pretty quickly, both of tokenized assets for the private assets in individuals' portfolios. This is not about crypto. This is about using the underlying technology to really make.
Reduce costs as well, because, the value chain at the back end is just way too long and way too cumbersome and way too expensive. There's a lot to do there. Did that get all your bits in? Oh, yes, I can see us doing that. Absolutely. Yeah. No, I mean. There's, we've clearly got a big investment trust business, you know, and UK Wind being the largest, which is now just outside the FTSE. The next iteration of that won't be 150-year-old technology. It'll be tokenized technology.
Hi there. It's Haley Tam from Credit Suisse. Can I ask you three questions as well then, just to keep the trend? To follow up on Hubert's question about capital and your answer on share buybacks, Richard, could you talk to us about how you will look at the relative merits of share buybacks versus M&A? Also whether we should think about this as something you can do from a GBP 600 million surplus level, or if you'd have to get back to GBP billions first? Second question, just in terms of the wealth management restatements, given we now have these three pillars to think about in terms of your 5% net new business, could you help us reframe your 5% perhaps on a subdivision or level to understand if there's any particular bias within those three?
On the third one, just on that same theme, I guess, given you have reframed wealth management, if we think about your solutions and your outsourced CIO business, could you tell us how much your net new business this period was perhaps also into Schroders funds as well as being advisory? Does that make sense?
Yeah.
Thank you.
I'm gonna kick off on capital.
Really difficult one to answer, Haley, because the relative merits change. It would depend on the share price at the time. Clearly, if you're contemplating buybacks, whether there's any interesting M&A in the pipeline, because often there's a very long gestation period. I think all I can reiterate is that we're very conscious we don't want to have an excessive balance sheet. We would look. If it was over GBP 1 billion, we would have an explanation of what we were going to be doing with that. Between GBP 600 million and GBP 1 billion, I think we're fairly comfortable. We clearly haven't gone through the enfranchisement vote yet anyway.
I think it's one to talk about at year-end when the capital position will probably have been rebuilt to the second half earnings as well.
I think if I was observing U.K. market, Next have done a really neat job of explaining their strategy. I think they, you know, they've done it for 10 years, and they say that, you know, it's about the opportunity price of your equity and the alternatives and, you know, what your view of all those variables are. I think as we go through and it becomes of relevancy, we can set out a statement a bit like Next as to how we'll make those betting decisions. It'd be nice for it to be a reality. Let's get through the vote first. Although I have to say on that one that, you know, all the proxy agencies have come out very supportive, which is great.
On wealth management, can we break it down at a subdivision level? I think that's really quite hard. You know, the thing is, I'm always concerned that we sort of narrow our guidance down to more and more bits and pieces, and we end up trapping ourselves in a corner. I think that clearly, one of the things we've done recently is we've launched an MPS product where we've started to see, much you know, a good take-up of that as over and above the growth we saw before. I think there's more to come there. Clearly, if we can add more businesses onto the platform, that's a very good way of then being able to engage them in wider Schroders funds.
I think being able to give you targets for each of them, I'd be nervous of, I'm afraid.
Yeah. It's worth reiterating, we do think the 5% reiteration is a slight enhancement to the guidance given the denominator has increased.
The amounts into Schroders' funds on the solutions bit in the first half, I think announced as GBP 0.1 billion, and is negligible.
Hopefully it's gonna be a much more important feature going forward.
Certainly if I look at the clients that we're now. The part of the reason for bringing the River and Mercantile business into Schroders was to enable that cross-sale of private markets capabilities into these long-term stable pools. T hat's certainly something we've got quite strong plans for, and really transforms the economics of that business into creating really long-term pools of stable capital. You know, although we'll have an insurance company, take our insurance company, to my mind, our low-cost equivalent is a solutions business that provides the opportunity to do that. Thanks, Haley. Bye. Oh.
Thanks. Michael Werner from UBS. I got two questions, please, if you don't mind. First on the wealth management business. We saw, as you noted, the net interest income doubled, or essentially doubled year-on-year. Can you let us know the sensitivity of that? And, you know, is there an opportunity for that to double again next year? What type of interest rate environment do we need to see? And then second, with regards to the new presentation, you know, thank you for the changes. I think it makes a lot of sense. The one thing I still have a question on is on the central costs.
With regards to where you put it outside of the operating profit, we tend to see some of your competitors putting those central costs within the operating profit. I was just wondering your thinking behind that decision from a comparable perspective. Thank you.
Those are both for you, Richard.
They are. The second one is, I think, the easiest one to answer. In essence, it's a representation of our group segment. We don't characterize our group segment as an operating segment going forward. I think at its heart, it's not. By being very transparent and putting it on the face of the income statement, what those central costs are, if you do want to allocate those, you've got two choices. You can allocate it on profits of the two segments or revenues of the two segments, but it'd be totally arbitrary. If I was to do that, you would have less disclosure and less understanding of some of the parts valuation.
I've given you the choice, but we don't, we've never allocated those in our management accounts, and that's how we've essentially always presented them.
We really didn't want to change the presentation of what we gave you before because, I always think with these things, you immediately look at it and say, "What's going on here?" To give the same numbers that we presented rather than lose information didn't seem to be a good
On the banking interest, leverage in the model. Yeah, clearly when rates were zero, there was very little earning capacity. We've gotta look after our clients as well, so we can now charge a reasonable margin. I don't see that margin doubling next year because the rates increase. That margin probably wasn't in place for the total full six months. There's a little bit of upside, but not the doubling into 2022 if rates double again. It's an appropriate margin that a wealth manager or bank can earn, but not an inappropriate margin.
Thanks, Mike.
It's Tom Mills at Jefferies. I just had a question on the private assets business. I think it feels like the renewable infrastructure piece is quite a key differentiator for this business now versus some of your asset management peers that are playing in the alt. I think you mentioned that you've expanded 3 offices year to date in that business. Can you maybe give us an idea about what your near-term plans are for expanding that? Which channels you'll be addressing? You know, just maybe a little bit more idea of how much that business can scale, because it feels like it really should be able to scale a lot on this platform. Thanks.
Yeah, sure. Thanks, Tom. So I mean, today, broadly speaking, there's a very large UK wind business. There's an Irish renewables business, which was just starting to do bits and pieces in Europe, and there's a few separate managed accounts for some pension funds. The opportunities, I think, are two or threefold. First of all, to really expand the European business across those broader number of countries. You'll have seen we've acquired some quite big assets now in Europe to, I think we bought Europe's largest wind farm off Germany, something in Finland and Sweden, I think and other countries. So we consolidate our position in France as well.
I think building out the infrastructure across Europe and then raising a European fund and separate accounts for European investors, for continental European power. That feels like, opportunity one. Opportunity two is build out in the U.S. U.S. market is structured slightly differently. But in effect, there is still a market for U.S. renewables. You know, and here, the average size of solar field is five or six acres. You know, in the U.S., it's 500 acres and plus. There are some big ones coming in this country as well. You know, doing it on a much bigger scale in the U.S., and there are some interesting tax issues that one has to get around in terms of basically credits that gets sold.
In essence, the U.S. opportunity to U.S. pension funds and to Asian pension funds for that business exists. There's the work in the U.K. I think the U.K. has worked very well. That and we're mindful that we don't want to scale that team. You know, that's gonna carry on going at the normal pace because there's a set of clients there, and we don't wanna overexpand that area. What I do think is that if you look at that market, we are now by being a very big player, when big assets come up for sale, and, Hornsea, which is, I think, the world's largest wind farm, that comes up in , that GBP 1 billion-pound tickets, and we were able to participate in that.
The number of people who are able to write a GBP 1 billion ticket straight away for an asset is very, very low. I think, the flywheel effect gets quite strong as you become a dominant player. Most of the people we've been working alongside are utilities, and they want us to take on those assets. I think there is a lot. The interesting thing is we're hiring engineers here rather than portfolio managers. That's a relatively easy business to scale. There's a formula for doing it. There's a lot we can do. I don't want to make a forecast as to asset raising, not least because the competing asset, as in some fixed income assets, yeah, have changed valuations.
Clients' appetite is gonna be an interesting one to judge. It's certainly a very attractive space. I think, you know, pension funds that are de-risking, we're looking for negative carbon assets. It's a great way to put money to work. More to do. Thanks, Tom.
Peter, can I just go back to Mike's question, in terms of the opportunity on banking interest? Because one is the margin, and I think, as I said, that's virtually stable. You should expect a slightly increased appetite to lend against client portfolios, given we can now earn a commercial return from that activity. I do see it growing, but not through an increase in margin, but an increase in the banking book.
Any more questions? In which case, I'll go to. Are there any questions online?
Yeah, there are. We've got a couple of questions. Just a reminder, if you're online and have a question, please raise your hand. The first one is from Arnaud Giblat. Giblat, please, repeat your name, the organization you're from before you ask a question, and unmute yourself.
Hi, can you hear me?
Yeah.
Hi. Hi, it's Arnaud Giblat from BNP Paribas Exane. I've got two questions, please. You talked during the presentation about competing against Hamilton Lane, StepStone and Partners Group in alternatives. I suppose you're alluding to maybe your retail products. What offerings you have there, and what are you developing until tokenization takes off? And a subset of the question, I think, is in secondaries. That's a part of the market that's seeing some good traction now, given the market dynamics. Do you see opportunities to gain access there? And perhaps is that an area you could look at doing further bolt-ons? My second question is on costs.
If markets remain challenging, what sort of flexibility should we think about in that context? Finally, on surplus capital, you talked about GBP 600 million to GBP 1 billion. For the right sort of acquisition, where could surplus capital drop down to? Thank you.
Just on private markets, first of all, Ana. We've got basically the primary offering we've got is in our GAIA fund range at the moment, which is effectively the semi-liquid product. We'll also be doing an interval fund in the U.S., which we're in the process of putting on the shelf, and ELTIFs obviously in Europe make that available. Obviously the new LTAF regulations over here also make it a U.K. equivalent. I think there's quite a lot of vehicles that we've got in the pipeline. You know, the degrees of specialization will vary by market. Everything from venture at one end right the way through to a fully diversified proposition.
That piece of it, there's a lot going. Clearly what's interesting about that is how few competitor products are available today. This is just an area where a lot of people have either not got the breadth to play, have not got the mutual fund distribution mindset to play. The spaces on the decks of the big distributors are still relatively open. On your question on secondaries, I think , if you think about the dislocation that we're going to see ahead, which I think is an inevitability in private assets, given, the froth that was in that market historically.
If you look in 2007, the biggest opportunity was in secondaries afterwards. I would expect that you will see we've actually hired a secondaries team and have just raised for that team. I think that, you know, people are recognizing there's gonna be a lot more activity in secondaries. There are very few businesses in that area. One or two of them have changed hands. It's an area we've always kept our eyes on whether there'll be some inorganic opportunity. While we've been waiting, we've got on and hired a team as well. That's progressing. On costs, if I start and I'll hand over to Richard. I think the first thing to say is we've kept our guidance at 45%.
We're not seeing the great resignation here. I mean, actually, if you look at our staff turnover numbers, they're actually running at levels that were, you know, almost identical to pre-pandemic. Our ability to retain staff has been very high. Our ability to attract the people we wanted to has been very high. The pulse survey we did with our employees the other day said 95% of them are proud to work for Schroders, which I think is against an FS average of, you know, high seventies or something, suggests that we're in a pretty good place in terms of retention. That obviously helps us in terms of numbers. 85% of employees here are shareholders in the business. So there's a good alignment. Richard, do you want to comment on?
Yeah, I do. As Peter said, at the 45%, in some ways our comp is 67% of our total costs broadly. In some way, we're insulated if markets are down, revenue's down, our key cost metric will go down if we can maintain that 45%. Within that 45%, we are always reinvesting for the future. We have a number of subscale new businesses that we're developing. Peter's referred to a number in the private credit space in his earlier presentation, and that's a really important part of what Schroders does. We're investing for future growth, and I don't see a change in appetite in that area. On non-compensation, we're comparing 2022 against 2021.
2021 had a lower level of marketing costs and lower travel costs, and they have broadly normalized this year. I also talked at the year end about the cloud migration. Do I want to stop that? Yes, it's expensive in the short term, but the savings that I talked about are tangible and real. Again, the nature of Schroders is we're not going to divert our attention on short-term markets from doing the right thing to generate longer-term efficiencies and profits. An enhanced cyber resilience, which is actually fundamental to preserve our reputation in the future, because that would be the ultimate risk factor if our business was severely damaged. There isn't. We run a lean back office. I do have some levers on marketing, a little bit on travel.
Could stop the cloud investment, but they'll be short term and the wrong things to do. At the moment, we don't have any intention of rowing back from the guidance I've given you. Clearly it is, has been impacted by FX. Sterling is weaker, but we benefit from a weak sterling from a profit perspective. I don't think you should get too excited by the FX inflation element of non-comp costs. We have bought some new businesses, and they come with non-compensation costs as well, but they are growing our franchise, growing our profits, growing our revenues. You've got to factor that into they weren't in the comparators, but they are in the new base.
I think to my mind, if you look at where the growth is coming from in this business, with a business where you've got 30% operating margins, growth is incredibly valuable. The growth that we're seeing this time is the organic investment we made in sustainability and private markets and solutions. That's what's driving these numbers. We don't want to give that up. Do you want to talk about balance sheet?
Capital. I guess the answer is theoretically you know, we have an early warning indicator. We are required to have that with the PRA. We have an internal buffer over and above the numbers you see. We need a buffer. It doesn't need to be GBP 600 million. There's regulatory changes afoot. The countercyclical buffer that the PRA took off a few years ago is probably going to be reimposed by the end of the year. The GBP 600 million level may not be the appropriate benchmark going forward . If we increase our banking book, lending book, which is an important area of potential future growth, the unfortunate impact of that is that also reduces our capital surplus because we have to reserve capital against lending.
It appears a big number, but actually in reality it's a smaller number than that. It can't go much lower without having a real business impact on day-to-day activities.
I think the other point is we've spent a lot of time over the last six years buying the businesses that we wanted to, and we said to you last time we met that we've actually bought the businesses we wanted to buy, and we've got those four pillars in place in private markets. So the need to do something has gone down a great deal. I think the point, I think it's Haley asking about share buybacks, that to my mind is a very interesting alternative way, which is a sensible conversation. Thanks, Arno. Is there any more questions online?
Yeah, there is. We've got a couple more. Next question is from Nicholas Herman. Nicholas, please unmute yourself. Repeat your name, the organization you're from before you ask your question.
Yes. Hi, it's Nicholas Herman from Citigroup. Three or three buckets actually. Just firstly on, I guess, on private assets. You clearly continue to invest in that business to platform it, and I guess that's a drag on operating margin. Just can you help investors frame how much investment is required to platform that business and how long that process could take? And then just a couple of small follow-ups on private assets. Just curious on how big the fundraising in secondaries was and how long you expect the first build-out phase for Greencoat to take. That's the first bucket. Secondly, on cost, what's the underlying cost inflation that we should be thinking? You're clearly quite poorly geographically spread, with also some exposures in the U.S. and Asia.
Just that would be helpful. I guess presumably that affects your non-core more than your core. Finally, just I guess we've seen some peers struggling incrementally in the current environment, which would be expected given the strong market downturn. There's been some reports of the restructuring of some of the private and traditional asset managers with the potential sales on the alternative side. Do you see an opportunity here to pick up any teams or maybe pick up a couple of smaller assets? Thank you.
Thanks, Nicholas. Just in terms of private asset replatforming, we're busy doing that, and we have been doing it for a little while already. That is included in the ongoing costs that we've got today. I don't think there's a big number out there that is gonna come along and sort of hit out of the blue. The second is number. I can't remember, but I think my recollection was that the first close was at GBP 300 million, and we're still raising. I may be wrong on that. Perhaps we can come back to you on it.
The Greencoat build-up phase, we're looking for that to happen pretty quickly. You should see those assets hitting more like the first half of next year will be the start of that build-up. The fund just hitting the road in September. The fund structures are being set up now. By the time we've got through closings, et cetera, it'd be the first half of next year, second half of next year. T hey will take time to build. These things always take time because we're going, taking effectively a new proposition to investors. I think that will happen with a reasonable degree of certainty. Underlying cost inflation rate, Richard?
I think it's fair to say, we've already dealt with the comp cost side of that. W e're committing to a comp income ratio of 45%. In a way that's self-correcting. On the other areas of our non-comp costs, we've got an increasing proportion of the link to AUM. Again, they're self-correcting. Clearly, there is inflation in travel. We've committed to reducing our travel by number of flights by half over 2019 levels to reduce our carbon emissions. The cost of that 50% reduction is in real terms now flying to the U.S. or Asia is significantly more than it was before. We're talking a few million GBP in the context of our cost base.
I'm sure you'll see a bit coming through in marketing, because that's third party exposed, and there'll be some inflationary element there. On our market data costs, we've lived with significant inflation over the last five years. We are now managing that number much more carefully and reducing usage wherever possible. I don't see the inflationary environment with the last five years of market data reappearing in the next five years. It's around the edges, but largely our business is.
There's nothing like the headline numbers of inflation that we see, you know, talked about in the media. Simply because so much of it is either comp or buildings and stuff, and stuff that's already hard coded in or agreements which, for software licenses, et cetera. Any more questions online?
Yeah. Looks like we just got one more. Mandeep Jagpal with the next question. Mandeep, please unmute yourself, repeat your name, the organization you're from before asking your question.
Morning. Mandeep Jagpal from RBC Capital Markets. Good presentation. Just one question on solutions from me, please. There's been some good wins in this business recently, but given the significant improvement in pension scheme funding levels from rising rates this year, trustees are seeing bulk annuities as a much more affordable and realistic proposition than they probably were even six months ago. Therefore, do you see any kind of risk of a fundamental reduction in demand for solutions or fiduciary management particularly as schemes who've previously been thinking about fiduciary instead to go straight to a bulk annuity?
It is a good question. What you've seen is two things go on. You've obviously seen the value of the liabilities that need to be hedged come down. Because it was hedged, pension fund funding rates have actually only improved by a couple of %. Although you'd expect, you know, rates have moved significantly, actually the ability of pension funds to take advantage of it was muted because the hedging has effectively worked against them in this period. We did see one, we had one outflow of over GBP 1 billion for a scheme that we'd managed for a long time that got to buy out.
You know, we could regard that as successful when a client gets to buy out, but it does mean we lose the assets. We're not seeing a wholesale shift in that market because of the nature of the hedging. There's just it hasn't manifested itself in that big move. I think it will be around the margin as inevitably, you know, the objective of a lot of DB schemes is to get to buy out. Inevitably over the next eight or nine years you'll see that headwind. I don't think you're gonna see a sea change at the moment because of the existence of that hedging. Thanks, Mandeep. Any more questions online?
No.
Thank you all very much. I'm sorry we've run over slightly, but thank you for being here and very best wishes for a nice summer holiday. Hopefully, everyone's getting one. Thank you.