Morning, everyone. Welcome to the Schroders 2022 annual results. I know you've had a busy few days, so hopefully we'll get through this in 1 hour. We're gonna follow the normal format of prior years. I'm gonna spend a little bit of time on strategy, flows. Richard is gonna take you through the detail of the financial numbers, come back, do a quick outlook, and any Q&A that you may have. Look, this was a set of results that we found pleasing, robust, and primarily because of strategic progress we've made.
I just wanna spend a little bit of time before we get into the detailed numbers on the reshaping of the business, because to my mind, that was the effort that we've been making over prior years to get this dynamic of the business changing. If you look at the high level now, 53% of our group's earnings are from the high growth areas that we've been talking about in the past. I'll come back and unpack that in more detail. Our recurring revenues, our operating revenues, were actually up 1% last year. The underlying that, and the drivers of that were really strong fundraising in our Schroders Capital business. We raised GBP 17.5 billion of new capital there.
The wealth management business, the advisory businesses there, grew at 6.7%. I'll show you the Solutions business, which, you know, was in a challenging market in the fourth quarter, and we'll come back and talk more about that, actually showed flat flows to the year on -0.2%. That's entering 2023 very much with the wind at its back. From an operating level, I think we've made a lot of good progress this year, and I think that reinforcing nature of growth has come a long way. Clearly, when we had this meeting in the past, we've always talked a lot about enfranchisement of non-voting shares. That was done, concluded, on a 1 for 5 rights issue.
That's all been done and put behind us. At a high level, quite a lot of headlines for 2022, moving in the right direction. I put this chart to just try and demonstrate the nature of the change we've got in the business. You're familiar with our wealth management businesses. We'll talk more about those. Long-term, sticky clients, high growth markets, where we've got really good market shares and are growing those market shares. Schroders Capital, which is now across alternatives, but most importantly, private equity, private debt, real estate and infrastructure, a full service proposition that is benefiting significantly also from our position at Schroders Solutions. Schroders Solutions is a big business now. It's a GBP 220 billion business.
There are very few people able to deal with the needs of complicated clients, and is a really a reference point for the most complicated things we deal with in our industry. Our institutional mutual fund business, Schroders Investment Management, which, as you know, we've invested very heavily in new products, thematics, sustainability. If you think of things like sustainability, it's driving growth in our charities business, it's driving growth in our wealth business, our solutions business is benefiting from it. To my mind, you can think of these as standalone entities, but you can also think of them as a bigger ecosystem where there is a self-reinforcing growth.
To my mind, the feature of 2022 was the point that that flywheel started working and that self-reinforcing growth started to come through, which is why you're seeing best in class performance fundraising in areas like wealth and Schroders Capital. That transformation I was talking about, when we first talked to you about this strategy in 2016, 35% of our assets had been in these areas. We're now up to 53% of our assets. Perhaps more importantly, revenues have gone from 31% in those areas to 46%. Clearly, as we enter 2023, the organic growth rates that we've got embedded in those other areas will take that further into the future. If I could just dive into the numbers now.
I talked about underlying net operating revenues, pre-performance fees up 1%. I think that was key for us to show that resilience. Operating profit, our KPI,well-reported was down 14%. We'll come on and talk more about that, but a mixture of markets, lower performance fees particular, but also the changing nature of our cost base, where we've been, done I think, a really good job of constraining the inflationary element, but a lot of investing for growth still going on. Assets under management of GBP 737 billion. Then flow numbers. We saw out of our main asset management businesses, across the area, GBP 1.6 billion of outflows. I'll come and break those down in more detail. The dividend per share up marginally at GBP 0.215.
Clearly, a key metric for us is investment performance. We've The numbers are here. You know, we the 3-year KPI is at 73%. That is a really important thing for continuing to grow. The chart on the right-hand side, which is one I've talked to you in the past a lot about, which is the longevity, the stickiness of our client base. If you look at our fundraising last year, gross fund sales were actually up 4% at GBP 128 billion. The thing that changed last year was that we had a higher redemption rate, and it's obviously been well reported that 2022 was a tough year for the industry, and lots of cyclical effects going on.
The reason why our asset base was resilient was that we were able to increase the fundraising rate by 4% to absorb the redemptions. That did have an effect on longevity, but you can see that long-term effect is still, I think that trend is still underlying intact. Just coming along and breaking now the business into the segments, and I'll talk through each of these segments in more detail. Just this is a high-level,, AUM chart, just showing the compound growth rates of the various businesses we've achieved over the 6 years since we put the strategy in place. At an operating level, wealth has shown a 10% revenue CAGR. Schroders Capital 24% and Schroders solutions at 7% because some of the bigger mandates we've taken on.
During that period, obviously, our JVs and associates profits has grown very considerably. To my mind, what we're talking about is the transformations that not only are those underlying growth of those businesses on the left of the chart strong, but the businesses on the right of the chart have shown a good deal of resilience. I think that's, to my mind, the thing that I wanted to really emphasize. That getting those businesses to be resilient into the future has been a big part of our investment proposition, and that's, you know, I think we've shown that this year. If we could just go now into more of the detail. Our institutional business, GBP 7.3 billion, it saw some inflows in the second half of the year. Really, that number.
My sense is a slight disappointment to me because there were two big... There was one Japanese outflow, which I talked about in the first half of the year, and there was one in the U.S. They really account for all of that GBP 7.3 billion, which is a frustration when you think how much work has gone on in there. Aside from that, I think there was quite a lot of progress made, particularly in changing the trend lines. We've talked about two difficult markets in the past, which were both Japan and Australia, where we've arrested that issue. That was progress. Our mutual funds, we'll come on and talk more about, but effectively GBP 5.9 billion of outflows was driven in large part by the cyclicality in Europe.
Over the last 2 years, net inflows into mutual funds, which I think against the industry background, is a positive one. I'm gonna come back and talk about the rest of those segments in detail, so I'll crack on into that. You know, from my part, GBP 11.6 billion of flows into Schroders Capital and Schroders Wealth. First of all, the wealth management segment. We set out an objective to deliver 5% growth in the wealth management segment. We've achieved that. We've actually achieved 6.6% in our advised businesses around the place, which we think is a really important test of has our organic investment, which we've talked about in the past, delivered. You're seeing that starting to deliver.
We've also continued to invest in new advisors, so we've further increased the number of advisors around the regions, and we would expect and feel confident about our ability to continue that commitment to future growth in the past. We do want to unpack this business for you in more detail. As a series, a number of further capital markets days, we're going to or capital market events we're gonna do this year. The first one we're gonna kick off in June with a deep dive into our different wealth businesses, so you can get more granularity on those. A few headlines here for you. I think Schroders Personal Wealth usually gets a number of questions, so let me address that one.
As you know, we have set about a transformation of this business over the last 3 years. It's now in steady monthly inflows. In fact, the gross inflow level, we're running at 9%. The advisors are starting to become a lot more efficient. The conversion rate has moved up very significantly during the year to 13.2%. To my mind, the challenge we faced is the relatively old demographic of clients within this business. You've got about 40% of the client base right at end of life. For here, there's a really good gearing for future growth because we've now hit a level of referrals and writing of new business which offsets that.
I think looking forward, the business is feeling like we've turned that corner, and we feel that the conversion rates, the referrals from Lloyds, are all working well. Our benchmark continued to grow its advisor base, the advisor firms on there. We've made further investments regionally within Cazenove because we see there's more to go for in a market which is really where the stronger getting stronger. Schroders Capital. Now, I talked about the number GBP 17.5 billion of fundraising, so that's a 34% fundraising rate. You can also see that the number of new clients where we've been able to cross-sell into the Schroders business has gone up very significantly during the course of the year.
However, the GBP 6.4 billion is below the GBP 7 billion-GBP 10 billion that we talked about at the end of last year. The frustration there is two things. One is the dry powder, which we carry into this yea, with some of the deployments that were going to happen at the back end of last year have been postponed, so there's about a billion and a half GBP or so which will be deployed early in 2023. That's the first thing. The second is that during the gilts crisis, we saw about GBP 2 billion of false redemptions which went out of our business, which impacted that NNB number. Fundraising number, I think we feel very pleased with. The GBP 6.4 billion was hit by some headwinds.
The underlying pattern of growth, I think, and a sense of the dry powder we take into next year, which is about GBP 4 billion of dry powder, I think we feel very comfortable in reiterating our target that we've set before of GBP 7 billion-GBP 10 billion of fundraising per annum. The areas where we saw growth were really across the piece. We saw growth in BlueOrchard, we saw growth in real estate, private assets, private equity, private debt, infrastructure. I think for me, in Trust and Securities, the breadth of that business really is now a one-stop shop and a competitive advantage against many of our peers that we're able to offer that breadth.
I think the second point, to just to reiterate, is if you've got a strong Solutions business, if you've got a strong business serving DB pension funds, there was inevitably a crossover between the impact on private markets and this business. There has been a hiatus in that during the fourth quarter of the year. If I look forward into 2023, we definitely feel that that's behind us. The pipelines that we're seeing and the progress we're making feels confident. I'll talk more about that in just a moment. Our Solutions business. Now, the underlying assets for Solutions during the year went up. Our flows were GBP -0.2 billion. The gilts crisis was clearly the major issue that happened in the year.
The outflows from our solutions business in the last six months of the year, which includes the September period and October, November, December, was GBP six and a half billion. We finished the year at GBP -0.2 billion in solutions, but the GBP six and a half billion outflow in the second half of the year. I have to say that the first two months of the year, that has been recovered. We saw a sharp dip and a bounce back. The River and Mercantile acquisition has proved to be strategically really important. Many of you will have seen the independent research on this sector.
We navigated that crisis very well indeed. I think the opportunity to take market share in fiduciary management, LDI, high-growth, and OCIO into 2023 is a very good one. Joint ventures and associates had a challenging fourth quarter. We saw GBP 10 billion out just in the fourth quarter, a net flow of GBP 6 billion for the year. This is a business, it's a high growth, it's a cyclical business. I think it's hard to make short-term calls looking forward as to where the assets will go. Our sense is that we had a difficult period November, December, January, actually February's turned around and now become positive. The key element for this is these are high-growth businesses. They're in markets which do have a degree of cyclicality.
The underlying dynamics and investment performance, particularly of our main businesses, is in good shape for the year, but disappointing in the final few months. On mutual funds and institutional, the straight investment management piece, the challenge in the mutual fund space I've talked about was GBP 3.7 billion out in Europe. UK was actually relatively resilient at about GBP 1.2 billion out. Our equities book actually was relatively resilient, which also had about GBP 1.2 billion out. The issue really across both institutional and mutual funds was in the fixed income markets, where we saw in aggregate for the group, including solutions, GBP 6.8 billion out. For these two segments, about GBP 8 billion, rather, of outflows for those two segments in fixed income markets.
As fixed income markets are finding a different level, one might hope that demand stabilizes. I don't want to make that prediction, but I think that the first couple of months of the year have definitely seen that. One highlight from my perspective is we've talked a lot in the past about Hartford. Hartford actually saw net inflows for the year. I think there are very few U.S. asset managers that saw inflows into active funds for the year, last year. They actually saw $0.5 billion of net inflow. Some progress there. One final issue is China. Our WMC launched in March in the thick of Shanghai lockdown, which raised GBP 2.3 billion for the year.
Importantly, at the beginning of January, we were granted a license for a wholly owned FMC in China, which is the final piece of that jigsaw, we've now got the FMC joint venture with Bank of Communications, the wealth management, majority-owned business with Bank of Communications, and now a wholly owned fund management company, which will probably begin work subject to inspections, et cetera, right at the very end of 2023. It's been a long journey, but I feel very pleased to have got those pieces, those building blocks in place. This time last year, we always talk about the great resignation and the real challenges on staff and maintaining staff and being able to act with real purpose and attract the right people.
I put on this page just a series of things that we feel are making us an attractive place to work. When we survey our staff, 96% of people say they're proud to work for Schroders. That makes retaining talent, a good, you know, relativelyOutlookhigh-growth strong. I think, you know, Glassdoor said that we were one of the best places to work in the UK, and we've made a lot of progress with objective analysis of where we stand on sustainability. We know that this is an area where being objective is really important in terms of how we will be seen over time. Whether you look at surveys like Global Canopy, where we were the number one financial institution globally on deforestation, or with ShareAction, or our plan for nature.
The number of proof points here gets ever stronger. That's really important to clients because at the end of the day, proof points is what is determining the actions that they take. With that, I'm gonna hand over to Richard, who'll take you back through the financials. Then we'll come back for outlook. Thank you.
Thank you, Peter, and good morning, everyone. Let me now take you through our results, which represent a robust set of numbers given the challenging environment. The performance reflects the benefits of our pivot towards low-interest-rate,full-year areas that Peter has already talked about. The performance of our wealth management and Schroders Capital business in particular, helped to offset the impact of wider market volatility. Including Schroders Solutions, revenues from these three strategic areas of focus were up 11% and now exceed GBP 1 billion. Given the extent of the falling markets during the year, that's strong growth. This helped us to deliver 1% growth in net operating revenue, excluding performance-based fees, and a robust operating profit of GBP 723 million. Let me now unpack this for you in more detail.
You all know the extent of the bear markets in 2022, which falls in the mid-teens for both equities and fixed income. Clearly, this has had an impact on our business. Whilst FX movements helped to offset this by GBP 80 million, our revenues reduced by GBP 137 million as a result. Despite this reduction, our net operating income was up 1% year-on-year when you exclude performance-based fees. The revenue growth was driven by 3 main factors: our net new business, acquisitions, and an increase in interest margin we earn from the banks in our wealth management segment. Taking each of these in turn, it was really great to see that our net new business generated an increase in revenues of GBP 48 million.
A large part of that stemmed from wins in the first half of the year, as well as the tailwind from the previous year. As you heard from Peter, we had net outflows in Q4, from lower margin products. This meant that we started 2023 with a headwind of GBP 7 million. I'm pleased to say that we now as a result of the net inflows we have since generated. Peter mentioned the acquisitions we completed in the first half of the year. These contributed GBP 87 million of additional revenues. Due to the timing of the transactions, we still had the benefit of around GBP 15 million to come through in our revenues in 2023. The final key driver in the growth in our net operating income was the net interest margin in our wealth management business.
As you know, that's a core revenue stream for us, but it's been impacted by the low interest rate environment of recent years. This increased by GBP 26 million to GBP 37 million following the rise in interest rates. To finish off on the aggregate view of our net operating revenue, we earned GBP 60 million of performance fees and carried interests. That's higher than my guidance despite the market volatility. Looking forward, we're budgeting for a similar level of performance-based fees in 2023, but as always, that's difficult to predict. This took total net operating income to GBP 2.5 billion. Let me show you how these movements break down between our business areas. Starting with our wealth management segment, average AUM increased by 3% to GBP 98 billion, driven by strong net new business.
That's despite a GBP 9 billion year-on-year fall in the value of AUM as a result of markets. Along with the higher net interest margin I just explained, this led to a 10% increase in operating revenue, which grew to GBP 394 million. The net operating revenue margin increased by 2 basis points to 40 basis points. Breaking this down into the individual components of advised, platform, and managed. Our advised business generated strong growth, higher average AUM, and an over 12% increase in revenues to GBP 331 million. Our net operating revenue margin was 2 basis points higher than my guidance, principally due to interest income. We expect this to increase by a further 2 basis points in 2023 to 57 basis points. Moving on to our platform business. Average AUM remained flat.
The net operating revenue margin of 15 basis points was in line with my guidance. We expect it to stay at this level for 2023. Finally, to our managed business. Average AUM increased to GBP 20.5 billion, principally as a result of the net flows we generated in 2021. Our net operating revenue margin was 18 basis points, and we expect it to remain at this level for 2023. Overall, that's a strong performance across the wealth segment. Now let's move on to the asset management segment, starting with Schroders Capital. The acquisitions of Greencoat Capital and Cairn contributed AUM of GBP 9 billion. This, together with the net new business that Peter talked about earlier, drove an increase in average AUM of 35%.
The market volatility did have an impact on our performance fees and carried interest, which reduced to GBP 90 million from GBP 44 million. It's worth me adding that given the environment, we were conservative in the recognition of carry. Excluding these fees, our net operating revenue increased by 26%. That's good underlying growth. Going into 2023, we have a tailwind of around GBP 25 million as a result of both 2022 net new business and the full year impact of our acquisitions. Peter mentioned the GBP 4 billion of non-fee-earningfee-earning, dry powder in the business. We expect around half of that to be deployed and become fee earning in 2023, with annualized revenues of around GBP 11 million. Our net operating margin excluding performance-based fees was 61 basis points.
That's a little less than my guidance, principally because we have moved our EMD book to the mutual funds and institutional business areas to better align with how we manage these businesses. We expect the margin to remain at this level in 2023. Our Schroders Solutions business. Although the value of our AUM reduced, reflecting the movement in markets, including the impact of the gilts crisis in the U.K., this was offset by the acquisition of R&M's Solutions business. Our average AUM increased by 12%, driving an increase in our net operating revenue from GBP 276 million to GBP 292 million. Excluding performance fees, our net operating revenue margin was in line with my guidance of 13 basis points.
I expect this to reduce to 12 basis points for next year due to the mix of net new business, including the strong flows we have generated since the year end. With the strong start to the year and the strong order book, we expect the annualized net new revenues to revert to showing growth for H1 2023. Overall, as I mentioned earlier, we've had good growth across our strategic growth areas of wealth, Schroders CapitalAUM, and Schroders Solutions. This helped us to mitigate the broader market challenges that impacted our mutual funds and institutional businesses. Both of these business areas were impacted by the fall in asset values and the risk-off environment. Average A-AUM for our mutual funds reduced to GBP 106 million. This translated into an 8% reduction in net operating revenue and a net operating revenue margin of 71 basis points.
That's a touch higher than my margin guidance earlier in the year. It's always difficult to predict the margin due to the impact of markets on our mix. For 2023, I would revert back to my guidance of 70 basis points. For our institutional business, net operating revenue fell by 13% to GBP 520 million. That includes a reduction in performance fees from GBP 79 million to GBP 32 million.
Excluding those fees, our net operating revenue margin was 34 basis points. That's 2 basis points higher than the guidance I've provided, principally due to the transfer of the EMD book I mentioned earlier. The makeup of our institutional business has changed in recent years and has become less prone to fee attrition. As a result, for 2023, I expect the margin to remain flat at 34 basis points, although as ever, market movement could impact this.
Overall, and in total across the business areas, our net operating revenues remained robust. Moving on to the returns from our associates and JVs, which is the final component of net operating income I want to cover. The development of our partnerships remains an important part of our strategy. As you can see from the chart, we've had excellent growth from these businesses in the last five years with a CAGR of 41%, despite the market challenges of 2022. Going forward, we continue to expect good growth for the markets in which they operate. In 2022, SPW delivered good underlying growth, with revenues increasing by 3%, driven by an increase in initial fees as a result of the flows that Peter mentioned earlier.
Our share of profits from our asset management interest was broadly in line with 2021, with good growth from our Indian venture with Axis Bank, helping to offset a fall in profit from our long-standing BoCom JV, the latter principally due to a smaller gain on seed investments in 2021. It's worth me pointing out that we consider the underlying performance of BoCom to have been really strong. Not only did it have the market headwinds to contend with, but it was also impacted by the China lockdowns, which were only recently lifted. Overall, that's an important contribution from these partnerships. In 2022, their contribution to our profit after tax increased from 13% to 16%. Moving on to our operating expenses.
Reflecting our good cost discipline, we reduced compensation costs by GBP 15 million or 1% year-on-year, despite the increase in headcount resulting from the acquisitions we completed. This cost discipline had enabled us to maintain our compensation costs at 45% of net operating income. For 2023, as always, bonuses will be finalized at the end of the year based on market conditions. Moving on to non-compensation costs. These were GBP 631 million, up from GBP 543 million in 2021. It's useful for you to understand the drivers of this. I have set out the key movements on this bridge. Let me take you through each of these in turn, starting with FX. As you know, around a third of our costs are non-sterling.
The weakening of sterling led to an increase in our cost of GBP 19 million, although this was more than offset by the GBP 18 million positive impact that the changes in rates have had on our revenue, which I referred to earlier. Onto travel and marketing costs. The ability of our people to travel and meet with clients is an important driver behind the success. Future success of our business, given the global distribution footprint of our business. Fortunately, the end of travel restrictions has enabled activity to return, albeit in a disciplined way, as we remain mindful of our aggregate carbon footprint and costs. For 2022, the increased volume of travel and higher marketing activity has contributed to an increase in cost of GBP 18 million.
That said, our focus remains on managing expenses. We have embraced new technology to help people to communicate more effectively. This has helped us to limit the increase. Our travel costs remain 25% below pre-COVID levels, despite the increased size of the business and significant rise in airline prices. Moving on to our investment activity.
high-growth, full-service, best-in-class. As youJustnon-fee-earning know, we continue to think long term and invest in the right opportunities. Our strategic acquisitions and continued expansion in China, including through our WMC, a new approved, wholly-owned FMC, contributed to GBP 23 million of additional expenses. Both the acquisitions and investment in China will lead to increased revenues. Another area where we think long-term is in our approach to investing the development of a flexible and scalable technology platform through our cloud migration program.
We have made significant progress here and have been able to accelerate the program, completing the migration phase 9 months ahead of schedule. As a result, we are already benefiting from greater cyber resilience and operational agility. This program led to an increase in cost of GBP 15 million. We will generate significant savings in the future. I will come back to that in a moment. Finally, on our 2022 costs, we continue to drive efficiency and cost savings wherever possible. As a result of a number of efficiency measures, the impact of inflation was limited to GBP 14 million. That's only 2.5% of our prior year costs, despite the strong inflationary pressures. Now turning to 2023, we have a continued FX headwind of around GBP 7 million.
Through our cost control, we expect to limit inflation to around GBP 5 million, which is less than 1% of our 2022 costs. We will continue to build out our presence in China with a full year of WMC operational costs and our wholly owned FMC going live later in the year. This, along with the full-year impact of the acquisitions we had completed in 2022, will drive an increase of around GBP 15 million. Finally, we are entering the next phase of our cloud program, which involves further decommissioning and data optimization. One of the benefits of the cloud migration is that it has enabled us to avoid spending GBP 100 million in server updates. With that, we have avoided the associated depreciation of around GBP 20 million per annum.
We have also avoided the material costs of renewing our data center leases and associated electricity and maintenance costs. When you put all those factors together, they translate into a like-for-like saving of GBP 15 million per annum, which we now expect to realize in late 2023, early 2024. Putting all of this together for your models, I would assume non-compensation costs are around GBP 660 million within operating expenses for 2023. I hope you now have a clearer picture of all the main drivers behind the movement in our operating profit year-over-year. Lastly, before I sum up, let me quickly update you on our capital position. As you know, we put a large part of our surplus capital to work through acquisitions.
This, together with other movements, including regulatory changes, means that our surplus now stands at GBP 655 million, compared to GBP 1.5 billion at the end of 2021. We will continue to hold a level of capital that allows organic investment and continue to target a dividend payout ratio of around 50%. In addition, we will be putting forward a whitewash resolution at the AGM, which, if approved, will provide us with additional option of share buybacks to manage our surplus capital position. To sum up. Our operating profit for the year was GBP 723 million, a decrease of 14% compared to the prior year. Our central costs, which reflect the cost of the PLC, were GBP 49 million, down from GBP 54 million in 2021.
We had a net loss of on financial instruments and other income of GBP 7 million, mainly relating to the changes in the value of our seed and investment capital. That's a real improvement from the position at the half year. In a normal year, you can see this if you look back over the past 10 years;full-yearJust we would expect gains from these investments to broadly offset the central costs. Our acquisition-related costs increased to GBP 86 million, reflecting the impact of the transactions that we completed in the first half of 2022. These costs include the amortization of intangible assets and expenses related to contingent consideration. For 2023, we expect these costs to increase to GBP 95 million as the full year impact of the 2022 acquisitions comes through.
These items result in a profit before tax of GBP 587 million. Our dividend payout ratio is now based on our operating earnings per share. Our effective tax rate on operating profit was 17.1%. We expect this to increase to around 20% for 2023, principally as a result of the change in the UK tax rate that comes into effect in April. This meant a basic operating earnings per share of 37.4 pence. In light of these results, to reflect our progressive dividend policy, we have declared a final dividend of 15 pence per share. This provides a total dividend per share of 21.5 pence. After allowing for the change in our share structure, this represents a slight increase on the prior year and represents a payout ratio of 57%.
Overall, given the market backdrop, these results demonstrate the resilience of the business. Now back to Peter.
Thank you, Richard. just gonna spend a moment on Outlook full-year. Just as. I've already spoken about how the strategic focus change of the business will be an important part of the profit drivers going forward. I think what we want to do today is to underline our confidence in the wealth growth and the private asset growth that we've talked about before. There will inevitably be a market impact, and sort of many of us will have views on what that is. I'm sure you will factor in your views on that. I think the underlying resilience and growth dynamics of wealth solutions and Schroders Capital will remain strong.
I think the comments I made about the year starting well, I want to sort of put out there, I think particularly in Solutions, but also a much more stable environment in mutual funds and institutional worlds, have come through. We're confident in the business we're building. We think the strategic focus is right. The board has re-emphasized that investment for future growth is the right thing to carry on doing. We are very willing now to take any questions you may have. Ready for quick off the mark. Could you just state your name and your firm?
Okay, thanks. It's Hubert Lam from Bank of America. I've got two questions. Firstly, on Solutions. Peter, just want to clarify what you said about the flows coming back. Did you say that the GBP six and a half billion that you lost in the second half has come back this year?
Yes.
Okay. Can you give us the reasons what's driving that?
Look, there was a very major change in the, there's quite a lot of independent research published, but, you know, different managers responded in different ways. We were very fortunate that we didn't have to forcibly redeem anybody. We, our price-pricing worked. We had sufficient collateral. When the analysis was done at the end of the day, our pipes worked incredibly well, our governance models worked incredibly well, and we had sufficient people to talk to clients through that. I think what that's going to lead to is a shift in market share over time, that will both reflect our business model and the quality of the pipes that we've got. We feel confident that there will be a net gain of market share in effect in a market that's changing.
Thanks. The second question is on Schroders Capital. I guess one of the consequences potentially of the LDI situation is people looking for more liquidity. Just wondering how that changed the outlook from UK pension funds going into private assets and how that affects you.
You're absolutely right. There was something of a fundraising hiatus in the UK DB market in Q4. The denominator effect of people feeling overexposed to less liquid assets is gonna be a feature going into 2023 and possibly even 2024. We are reiterating our overall guidance because we think we can achieve the growth elsewhere. Undoubtedlyfull-yewe've,? What,,. Where, It is a headwind in the UK DB market. The converse, and we don't know whether the government will finally come out on this, is whether or not there's gonna be a change on Solvency II, which would free up more money to flow into private markets and risk assets over time. That's still work in progress.
Great. Thanks. Final question is on your surplus capital position. It's about GBP 650, I think. Just wondering what your target for that is. I think historically people always think about it as close to GBP 1 billion before you, able to do larger, like more deals or potentially buybacks. What's your target for capital before you start thinking about doing external, acquisitions or buybacks?
Hubert, I wouldn't characterize it quite the way you described. What we've said is if it was in excess of GBP 1 billion, we would find ways of returning that to shareholders. Anywhere between where we are now and GBP 1 billion, we might have, you know, plans for M&A, we might have plans for organic investment, but within GBP 500 million-GBP 1 billion, we feel very comfortable. Over GBP 1 billion, we'll be looking at ways of returning that to shareholders.
We get embarrassed over GBP 1 billion.
Yes. I think you've been questions. It's Nicholas Herman from Citigroup. Three from me. If I could just go to cost, please. Just I was interested by your comment. I think you said GBP 55 million inflation for 2023. Can we just dig into the moving parts there? I thought you were gonna comment there, so please.
Yeah, there's lots of moving parts. There is obviously this inflationary environment, particularly in IT costs, license costs. Microsoft, most organizations use Microsoft. Microsoft price increase of 9% year on year. To limit that to 1% is requires a lot of other programs to mitigate the inflationary environment we're in. The background inflation, especially in technology, is significant. We are working really hard to mitigate that.
Okay, fine. There are other savings as well from integration of businesses too.
Right.
... how the overall investment budget is trending year on year.
In terms of the change program, we have reduced our change appetite by 20% this year.
At the same time, you know, costs are clearly impacted by full year acquisitions. That's unavoidable. They are obviously part of our strategy in terms of driving revenue growth. The rollout of those two wholly owned, one wholly owned business in China and a subsidiary in WMC, is also, you know, the full year effect of that is significant. They are real growth businesses that will deliver real enterprise value in the future.
Got it. Thank you. The other 2 questions, one on the ESG and one on Schroders Capital. Just curious, you talked about a strong focus on investments into ESG. Any comments about the particular areas of investment there? I think that'd be quite interesting to get a comment on that, please.
I think the, this is an area which is growing quickly, and I think if you, if you look at the flow dynamics of the industry, getting it right is critical. Despite all the noise in 2023, sorry, 2022, about, you know, changing dynamics of the world, sustainable funds still took market share. I think that's a really important underlying dynamic, despite what's going on. From my perspective, We've started by making a very significant ability in data and helping people understand their portfolios. That's the first thing, and that's a really important basis from which to manage and give regulators comfort that you're doing what you say you're doing.
The data piece was a big part of that and helping your analysts really understand what's going on. Where this goes to next is engagement. I think we published our blueprint for engagement earlier this year. That ability to demonstrate that companies are moving along the curves that they've set out, or helping companies establish the curves they've set out, and being clear on the governance position. The ability to speak with and understand companies and then explain that back to the asset owners is a really important part of the next stage of sustainability. I would say is, you know, people do tend to oversimplify this discussion. There is a narrative which says the US doesn't do this stuff and the rest of the world does.
You know, we're seeing very significant growth in socially orientated funds in the US. You know, being able to, to slice this through an environmental lens, a social lens, and a governance lens is an important part of having a more nuanced debate with people about what people want out of their investments beyond return. Some people want impact, some people want something societal, some people want something environmental. That's where this goes next.
The last one, sorry, I'm conscious of time, but on Schroders Capital, you're clearly very constructive on the flow outlook. We've seen a lot of the listed alternatives seeing much lower growth this year in a tougher environment. At an industry level, it looks like the overall commitments will be down this year. Just what are the areas that you could please talk about what are the specific areas where you expect to be, you know, defining those trends to take share? I guess you also commented that the business will now focus on operating leverage. If I could just repeat the question I asked at the half year, which is kind of how much of a tailwind is that now? I guess for the overall asset management business.
Thank you.
It's an important question. We recognize that many other people have downgraded their expectations for growth. I spoke a little bit about the flywheel effect and the self-reinforcing growth that you can get from being involved in other parts of the industry. I think that will help our position. We've also got the benefit of having acquired Greencoat during the course of the year, which is a helpful piece. Most critically, having the full hand of cards that, you know, private debt, private equity, real estate and infrastructure is a really important part of being able to have a holistic conversation so you can solve someone's private assets answer as a whole, and that's a relatively unusual position to be in. Does that help? Yeah. Haley, do you want to go?
Thank you. Haley Tam from Credit Suisse. Could I ask two quick questions, please? Could I just confirm, are you not giving any compensation costs to revenue guidance anymore? 'Cause I didn't pick that up in the presentation, so I just wanted to check.
Haley, I haven't done. It clearly depends on market conditions. If I was doing it now, if you could tell me what markets are gonna do, I will give you an absolute commitment. Yeah, we'll be very disciplined. If we look back 20, the real proof point is 2022 was a really difficult year. Yeah. We didn't increase our ratios, and we actually reduced compensation costs, notwithstanding quite a significant increase in headcount, principally due to the acquisitions we've made. We've got a track record of being disciplined, but I don't want to look forward and tell you what revenues are gonna do, which are clearly dependent on markets. There's one more nuance to this, Haley, is that the crossover between non-comp and comp costs is quite common. What you bring in, what you put out.
I think one of the things we're doing this year is focusing more on what's the total envelope of costs, and have we got things in the right place, and should we be insourcing or outsourcing? It's another thing where we're reluctant to say it's all one way, because we're not entirely certain where we're gonna fit, what we're gonna achieve on in that mix change during the year. We'll be very transparent at the end of the year.
Thank you. The second question is about the 44% of funds that are outperforming over 1 year. Is that a metric that matters? Is it something that would already have been seen in the outflows you saw in mutual funds institutional last year? Is it maybe something we might take into account for this year?
No, I think it's very much a reflection of the fact that indices are down. Where you've got, particularly in multi-asset, for example, where many multi-asset funds have a CPI hurdle or an absolute return hurdle. You get this impact that when markets are down, you've missed your straight hurdle. If you look at where we sit versus competitor funds, the picture is much better. I think that's the first thing. The second thing is that, yes, active managers had a bad year versus index last year. Although that 44%, I don't think it I mean, in the short term, it doesn't feel like there's an impact on flows. 3-year number is still very strong.
The 5-year number is very strong. If you saw those weakening, I think that would be a bigger conversation. I don't feel under any performance pressure at the moment, related to flows.
It's also very pleasing to see since October, every month it's been a very strong relative performance.
Yeah.
Since October.
Bruce Hamilton from Morgan Stanley. Just one question from me. Obviously, significant progress in terms of the strategic pivot to the growth areas. In terms of the sort of flywheel benefits, sorry, from here, are there any sort of missing ingredients or things that you still need to kind of strengthen through non-organic? Where is... Or is it more a case of just, you know, accelerating that sort of virtuous circle? You mentioned a bit about private capital, where would the other opportunities be? Perhaps in private wealth bespoke solutions or other sort of portfolio delivery, I'd be interested in that.
Yeah, it's a really good question, Bruce. Do I feel there's a big gap? No. I think we've, you know, getting those 4 pillars in place and getting a good sustainability and impact offering together was the priority. Getting the that integrated into the business in a different way, I think is the next bigger challenge. We've made some quite fundamental changes in how we go to market. Our industry in the past has talked about distribution. Distribution feels like something you do to electricity or water, or you do to your client. You send them something. You know, professional services firms or other industries focus much more on what the customer need is.
Because we're able to wrap around every element of that, figuring out how you put the client piece in the center to accelerate the flywheel is the next piece. If I take something like sustainability, ability to really help clients understand the whole of their assets, and that opens up conversations about OCIO. It opens up conversations about, you know, you're solving the problem, or you need a matching asset for that, or you need, or you create wealth needs. If you think about post-retirement micro LDI being a long-term solution for individuals' retirement rather than it just being an institutional product.
I think that development function of meeting the client needs becomes the next third generation of our industry when we start to think about people other than being the end of a distribution hose. Do you want a pink one, a red one, or a blue one? That doesn't feel the right way to go to market. Thanks, Bruce. Sorry.
Morning. It's Gregory Simpson from BNP Paribas Exane. Can I just ask about the potential ban on retrocessions or inducements in Europe? Any thoughts at this stage on how that might play or how that might impact your kind of business and your concepts in Europe?
We're very relaxed about it. I mean, we, you know, we've obviously worked very closely with distributors embedded in a lot of what they do, you know, as a, as much as the brains trust. Where Europe finally settles down, and we've been talking about this issue for 10 years, and it's sort of, you know, RDR turned out to be, I think, a relatively good thing for our business in the UK. We've seen the same happen in the markets about where Europe comes. I mean, the power of the banking distribution model is a really, you know, uncertain.
Thanks. Are you seeing any signs of changing appetite between asset classes in a higher rate environment between equities, fixed income, multi-assets? How do you factor the relative underperformance by these times? Is there a return fixed income at a higher rate environment?
There's a massive demand for asset allocation conversations and the role of multi-asset, because I think last year was the first year when it cracked. This matters. That is important. The second is, I think we've seen a complete stabilization. You went through a really difficult period last year where, you know, fixed-income funds were very much out of favor. Uncertain that's definitely stabilized coming into, you know, the year. Non-fund is returning quite nicely, and we're seeing that come through.
There is a in the core real estate space, particularly in the UK, I mean, as a comment that was made earlier, I think it was on demand for real estate in the post-DB environment, you know, that's clearly weak because people don't even. The value-added space is alive and well. I think there's, there are some nuances, but the big shift is the governance and asset allocation thinking within clients is the area where they're thinking, "We've got to get this right going forward." You know, the how are we going to deliver in a world of inflation and low returns is a really big issue for clients around the world. If you.
If you're a low-risk European saver, last year was a really difficult year, and that's challenging people's thinking and making them think about their business models, and that's a good thing from our perspective. Great. Thank you. 5 minutes ahead of time. Thank you all very much. I look forward to seeing you in either in June for our Capital Markets Day or July for the interim results. Thanks, everyone.