Earnings Call: H2 2019

Mar 5, 2020

Morning, everybody. It is 9:00, so make a start. Thank you for coming in person, and thank you to all those of you online. Welcome to the Schroders 2019 financial results. We are going to run this in exactly the same way as we ran it last year. I will stand up and talk a little bit about flows, structure of the business, an overview. Richard Keers, as our CFO, will then go into detail on the numbers and give you some guidance on forward-looking numbers. Then we will both take questions both from the floor and then from online. This was a resilient set of results from our perspective. There were three major events which happened during the quarter. One, organic growth with the taking on of part of the Swift mandate, 45.4 billion of assets in aggregate flowing into the business. The second was inorganic activity and the acquisition of BlueOrchard, which gave us a leadership position in impact investing. The third was the kicking off of the joint venture with Schroders Personal Wealth, with Lloyds Bank, which was an important partnership for us. So you have seen the results, but I will not go through these numbers in detail. We will obviously unpack them a lot more in a moment, but really the highlights are revenues up by a small amount to GBP 2.124 billion, profits of GBP 701.2 million, and the dividend per share in line with your forecast of 114 pence. We do think that it is very important to give you more granularity of how our strategy is developing. So there is a change to the report in this year, and I want to take you through that in some detail as we go through this to better understand the different growth dynamics of the business and how it is aligning with strategy. I hope you will all recall it, but just in case anyone has forgotten, the strategy highlights are really three pillars. First of all, to grow our core asset management business, and we are doing that predominantly through three things. One is a growth of solutions. Second is growth in new geographies and developing smaller markets. The third is through leadership in ESG. I will talk more about all of those three things in a moment. The second is getting closer to the consumer. We are prevalent now in all the wealth channels, both from the mass affluent through to the ultra-high net worth in the U.K. We made a further acquisition in Singapore this year, Thirdrock. But getting close to the consumer is an important part of it. Alongside that, you should also bear in mind the joint ventures we have got with banks in Asia. So both Axis Bank and Bank of Communications, where again, we are getting closer to banking consumers. The third is doing more in private markets, and we will talk more about the progress we have made there. But those three pillars are all driving towards creating more longevity in the business, and we talked about that at Capital Markets Day. It has been a recurring theme. But what I want to do now is just to give you the granularity to show you how that has developed in the four years since we put this strategy in place. So we want to report going forward under five business areas. Our high-level segments have remained unchanged, but beneath that, we are going to break out into five business areas. In your packs, you have got both the old basis and the new basis and a map to get between the two. There should be nothing lost, and we are very happy to give you all the granularity of how to get to the two. Going forward, this will be the basis we will report because I think it much better helps explain the way we run the business. First of all, if we go through the definitions. Wealth management, I think is very self-explanatory. It includes Schroders Personal Wealth, the Benchmark Capital businesses, including the platform. It includes the Cazenove businesses and our offshore wealth businesses, so what we call Schroders Wealth. Those businesses, that segment remains unchanged. Private assets and alternatives is sort of what it says on the tin, private equity, infrastructure, and all the things we do in alternative assets, including our GAIA platform, where we host third-party hedge funds on our platform. The solutions business is probably the one which needs the most unpacking. It is everything we do which is outcome-orientated. If it is a DGF mandate, if it is a partnership with an insurance company looking after their balance sheet, if it is a risk mitigation product, if it is a liability matching product where the outcome is more important. You will be aware that that is a significantly faster-growing segment than other parts of the market. We have not shown this separately before, and we think it is important that we do. The fourth area, mutual funds. This is our Schroder-branded mutual funds or co-branded mutual funds. It does not include the sub-advisory business where we might advise a mutual fund for somebody else because we think it is important to give clarity to the bit which is Schroder branded. Finally, it is the index relative business, so predominantly our equity and fixed income, index-orientated strategies, which we have called institutional, but it does include sub-advisory business because I think that has institutional characteristics and the mandates run like institutions are priced like institutional mandates. Those five things align pretty directly with the strategy. As I said before, we will report on this basis going forward. What I want to do now is just give you the numbers which underpin that and may provide the basis for further discussion later on. First of all, the assets under management in each area. Wealth management, GBP 66.7 billion, as you can see in the historical segment. Private assets is now GBP 44 billion of assets. Solutions, GBP 142 billion of assets. As you will see in a moment, that is a lower margin business, so the revenue contribution is lower. Mutual funds, GBP 102 billion of assets, and institutional, GBP 144 billion of assets. Let me just put that not in asset basis, but as a portion of the total group, and then on a revenue basis. If we look at this as a group level, for the first time, those three first segments, the growth areas of the business which we have been pushing, are now more than 50% of our assets under management. That is an important milestone for us as we cross the bridge towards having a greater preponderance of our business in growth markets. Those three make up over 50%. Actually, that doesn't include our mutual fund business, where the dynamics are not unattractive at all. But that was a nice milestone to pass. Let's now just look in revenue terms at each of those five buckets. Wealth management at GBP 300 million, just over private assets, again, GBP 300 million of revenues. Solutions, as I said, big in assets but smaller in revenues, GBP 226 billion. Our mutual fund business, still the highest revenue margin business, GBP 734 million of revenues. But the institutional business, the bit which is the index relative business, if you recall, GBP 502 million of revenues. So what you take from this is the revenues on the left-hand side, the GBP 820 million of those first three columns, now exceeds the GBP 500 million of revenues that we get from the institutional business. The partnerships and acquisitions which we've struck late in the fourth quarter of this year, so the onboarding of the Swift mandate, the acquisition of BlueOrchard, and the Schroder Joint Venture, will only further exaggerate this shift as we go into next year, because all of those were fourth-quarter events. So you're going to see this chart develop further and reinforce the strategy which we put in place going forward. If I just carry on expanding this a little bit further, this is the net new business by channel expressed in a new format. You can see there's GBP 14.7 billion of inflows into our wealth business. That is in three parts, GBP 12.6 billion of inflows from the Schroders Personal Wealth business, GBP 1.2 billion, 4% of AUM into the Schroders Wealth, the Cazenove and international business, the ultra-high net worth business, and GBP 0.9 billion into the Benchmark Capital business. Private assets saw GBP 2.8 billion of inflows. That was predominantly private equity, some securitized credit, infrastructure, finance, et cetera. Solutions saw the largest inflow, GBP 34.5 billion. The largest share of that, but not all of it, was related to the Scottish Widows onboarding, which we did the first pass of it in the fourth quarter. Mutual funds saw GBP 1.5 billion of outflows. There was an important shift change, mix change in that 1.5. So what we saw in that was that there was GBP 7.1 billion out of equities, GBP 4.6 billion into fixed income and GBP 0.8 billion into multi-assets. So you're seeing, as you saw through most of last year, we were in a risk-off environment. Our assets under management at year-end were up 23%, but as Richard will come on and talk about in more detail, our average assets under management were only up 2%. For most of the year, we were operating in a risk-off environment, and that was behind the shift between equities and fixed income in mutual funds, which we saw, which went on really for the first nine months of the year. Finally, the institutional business, minus GBP 7.1 billion of flows. That was minus GBP 8.5 out of equities, and GBP 1.6 billion into fixed income. So again, a mix change within the institutional, which was negative from a margin perspective. Again, Richard will talk about that some more. But the key strategic driver for my mind is the left-hand side of this, where you are seeing very consistent flows into each of these three columns. I want to talk more about the long-term performance of each of those. If we do, first of all, the wealth channel. This is the five-year numbers for the cumulative net new business and revenues for that business. You can see that whilst we took in a steady flow of new assets during the period, the compound growth in wealth revenues over the five years is 46%, which will be higher when you have the full year effect of Schroders Personal Wealth because the assets are up over 100% in that period. The acquisition of Thirdrock didn't make a vast difference to these numbers. It was a relatively small acquisition, but it was important strategically because it gives us a strong foothold with an advisor base in Singapore. We think Singapore represents an important market in so far as the characteristics of it are ones that we recognize closely, and we already have a very strong brand at Schroders in Singapore today. If we just move on into private assets, again, you will see a very similar chart of steady incremental growth. We have seen 123% growth in our revenues in private assets over five years. We would expect to see that grow further going into the next year. There is a slight margin mix issue going on here because there is both our GAIA platform, which is slightly lower margin, and our full-fat private assets business in there, but very consistent growth. I think, as you can see from the pie chart on the right-hand side, a very good diverse mix of assets. The same charts again for the solutions business. Revenues in the solutions business has grown 90% over five years. Again, we would expect to see further good follow-on growth next year as we have the full year effect of the Swift assets that we have already taken on and the additional assets that we will see next year, and an interesting pipeline of other new business. If we look at the same chart for our mutual fund business, you will see the dynamics of this are less attractive. So net-net, we have managed to sustain revenue increase of 25% in mutual funds, but actually, given the beta effect, that is really only a small net new business over the five-year period. Over the four years, revenues have gone from GBP 631 million to GBP 734 million, which is up, but clearly, not the same gross numbers that we have been seeing in the other areas. A five-year CAGR is still at 5%, which is not unattractive. Then finally, the business where we think nobody would argue there are headwinds, and that is the institutional index-orientated business. Here, over the four-year period, you can see revenues are flat. Over the five-year period, they are up 14%. But the number on the bottom right-hand side, we have seen steady incremental outflows from this business. We don't expect those headwinds to go away. This is where we are seeing the substitution from traditional passive insourcing and all the things that we have talked about at this meeting before. But what is important to my mind is that the aggregate revenue of this business is GBP 500 million, and you will be able to monitor that much more closely going forward than you have been able to hitherto. That was a quick overview of the new segmental reporting. I would just like to go back and look at some of the other segments that you are used to reporting on. The dotted line on this chart is the traditional institutional flow number that we would have shown you historically, including solutions and including sub-advisory and those bits and pieces. You can see the difference in dynamic when we split out the two businesses, that those jaws between the dotted line and the other line are really what I would call the industry headwind delta. I think hopefully that is helpful in terms of giving you the dynamics of those two. The measure that we have often said to you is important to us is longevity. We have said consistently that if we can have more sticky assets, the business will be more durable. Although we are very geographically diverse, we want sticky clients. This is a measure of outflows of starting AUM. It started at 32% at the start of this chart, and is now down to 22%. Again, we would expect to see that trend continue as we move into more high longevity segments, the first three solutions, wealth management and private assets. That is an important trend and important thing for us to keep on monitoring. If we look by asset class, we saw inflows into all asset classes last year, when you include Swift. When I have already given you the numbers excluding the Lloyds assets, we saw an underlying flow out of equities into fixed income and into multi-asset. So fixed income, multi-asset, private assets, all positive. Equities was the only area last year that we saw outflows. If again, if we just look the same lens, but through geography, clearly the U.K. saw a very significant inflow, as you would expect because of funding of that mandate. It saw GBP 3.3 billion of underlying flows in taking that out. Asia-Pacific saw small outflows of GBP 1.1 billion. That is, I think, a number that needs putting in context. Australia saw GBP 2.2 billion of outflows. So the rest of Asia saw inflows. It excludes, importantly, our two joint ventures, Bank of Communications and Axis Bank joint ventures. Both of those saw very strong inflows, and obviously both are Asian-based. But we do not include those as part of our consolidated reporting. In Europe, we saw GBP 2.1 billion of outflows. That was very largely the mutual fund environment. You can imagine it is the normal markets that are high beta, so Italy, Spain. In fact, we saw good inflows in Germany. We saw good inflows in Eastern Europe, et cetera. But we did see outflows in Eastern Europe. Then the Americas, we saw GBP 3.3 billion out. Again, we saw positive inflows in mutual funds of GBP 0.4. In fact, the Hartford Schroders range was 63rd out of over 800 managers in terms of net flows. So we were pleased with the performance of mutual funds in a U.S. mutual fund environment, which was difficult. But we did see one or two quite lumpy outflows, particularly in Mexico, which is in that number. In aggregate, the diversity of the business, again, being a very important consideration that there were many positives, many minuses across the overall flow picture. But in aggregate, GBP 44.5 billion of inflows we feel is a very good number. And particularly in first half versus full year, our underlying business, excluding the organic growth from Swift, was actually flat, which was an important step in the right direction in an industry going through disruption. I will stop there. I will hand over to Richard, and I will come back and talk about the outlook in just a moment. Thank you. Thank you, Peter, and good morning, everyone. As you just heard, 2019 has been a good year as we made important progress towards our strategic goals. Today, we are giving you additional detail to help you understand the impact this is having on the shape of our business. This will add more clarity on how our business is growing, enable you to make sense of the changes we are seeing in our revenue margins. It means we are moving away from our traditional channel split of institutional and intermediary. We recognize that this is a significant move, and to help you, we have provided the old channel view within your data packs. Before I take you through the change in detail, let me start with an overview of what we think are a resilient set of results given the challenging environment that is facing the asset management industry. Net income was just GBP 1 million higher, so broadly in line with 2018. In July, we increased our comp ratio to 44%, and as a result, our comp costs were GBP 24 million higher. In line with our guidance, non-comp costs increased GBP 37 million. That means profit before tax and exceptional items of GBP 701.2 million. We had exceptional items of GBP 77 million. These are typically acquisition related, principally amortization of intangible assets. But this year they also include GBP 29 million related to a further cost reduction program. This is another step to realizing operational efficiencies from the investments we have made in technology. The program enables us to manage our total costs and still reward our people appropriately in order to retain talent. It reflects our continued commitment to cost control, which is a key factor in delivering sustainable shareholder returns. Looking forward, we expect exceptional items to be at a more normal level of around GBP 65 million in 2020. We had a tax rate of 20.6% after exceptional items. That gave us a post-tax profit after exceptional items of GBP 495.7 million, which was 2% down from 2018. Despite this reduction, we have maintained our final dividend at 79 pence, which gives a full year dividend of 114 pence. Overall, this is a resilient performance. Now, let me explain the movement in the average AUM that Peter has already referred to. Understanding that movement is important for these results. It was up 2% year-on-year and compares to a 23% in closing AUM. The difference is driven by the timing of movements. So let us look at how AUM has moved as a result of markets over the two years. You can see that markets increased average AUM by just over 2%. Although markets ended 2019 strongly, the average was impacted by market falls we saw towards the end of 2018, with many equity indices suffering double-digit falls in the final quarter. Now let's look at how AUM moved as a result of FX. The movements are less pronounced. Although sterling did strengthen in Q4 2019, it was on average weaker for us than in 2018. That's mainly due to movements against the USD. The overall effect was to increase our AUM by around 1% relative to 2018. Both markets and FX had a positive impact, and you can see how that has impacted our net income on this slide. Markets increased revenues by around GBP 43 million, with a further GBP 14 million increase from FX. But that benefit was partly offset by mix changes and margin attrition, which reduced our revenue margins by about a bp. That reduced revenues by around GBP 50 million. We also saw a headwind from net flows, which decreased average AUM and reduced operating revenues by a further GBP 51 million. That's the combined impact of 2018 and 2019 net flows. This chart shows the strong headwind we faced at the start of 2019, and that I highlighted this time last year. That was the result of the annualized revenues we lost from the outflows in 2018, which reduced revenues by GBP 35 million. As you've just heard from Peter, we had net inflows of GBP 43 billion in 2019. The majority of those flows came through towards the end of the year. But you'll recall we had net outflows in H1. Remember, we're looking at a waterfall here of year-on-year change, so this profile has an impact. It means the in-year impact of 2019 flows was to reduce revenues by GBP 16 million. However, we had net inflows, so this is just timing, with the revenue benefit to come in 2020 of GBP 6 million. As I mentioned at the start, our business is changing, with net inflows increasingly focused around our strategic priorities. To help you understand this, I'll move on to the detail I referred to in my opening remarks. By breaking down our performance into the five business areas that Peter described, starting with wealth management. We have again seen good growth with net operating revenues up 7% to GBP 302 million. Average AUM rose 12% to GBP 51 billion as we generated net inflows of GBP 15 billion. That builds on the positive momentum we have seen over the past few years and reflects the increasing significance of this part of our business. Our new JV with Lloyds Banking Group, Schroders Personal Wealth, contributed GBP 13 million of revenues. We acquired our interest at the beginning of October, so that's just the revenues from the last three months of the year. SPW brings together our investment capabilities and impressive product offering with the distribution footprint of Lloyds, providing wealth management services to a currently underserved part of the U.K. market. It leverages Benchmark Capital's technology platform, and the client assets and flows are included in our wealth management AUM. Although this is a joint venture, our segmental results include our share of SPW's revenues and costs in the respective line items. Showing it this way reflects how we manage the business and provides more relevant information about the revenue margins we earn on the assets. In accordance with accounting rules, our statutory income statement shows our share of the post-tax profits in a single line as part of our share of profits from associates and JVs. Wealth management revenue margins, excluding performance fees, were 59 basis points. They are 2 basis points lower than 2018, mainly as a result of lower transaction fees and a reduction in our net interest margin relative to the increase in average AUM. The margins also include the impact of the Thirdrock wealth management business we acquired in Singapore, which is at a slightly lower revenue margin. That investment is part of our strategy to further diversify our business by geography and to develop our wealth management capabilities across Asia. To be clear, the revenue margins also include our share of the net operating revenues earned by SPW. For your models, we expect our margin to decrease by around 1 basis point in 2020 due to lower transaction fees and the full year impact of Thirdrock. Moving to asset management. Asset management net operating revenues decreased GBP 26 million in 2019. We generated performance fees and net carried interest of GBP 72 million, reflecting strong investment performance. That's up GBP 18 million compared to 2018. To help with your models, we are again budgeting for around GBP 50 million of performance fees and carried interest in 2020. Excluding these, net operating revenues were down GBP 43 million or 2%. The decrease was driven by a change in mix, including a GBP 37 million headwind from the outflows we had in 2018, partly offset by a 1% increase in average AUM. Let's now look at how that breaks down across the four business areas that make up asset management. Private assets solutions, mutual funds, and institutional. First, private assets. Revenues from our private assets and alternatives business have more than doubled in the past five years. As Peter explained, we now manage more than GBP 44 billion of assets. These products typically demand a higher revenue margin than our other institutional business, and that's before carried interest and real estate transaction fees. As well as being at higher margin, these assets have a greater longevity, with many products existing in close-ended structures that can have a life cycle of over 10 years. This means that the cumulative revenues earned over the life of the assets can be very significant, even from relatively small flows. In 2019, we had a net operating revenue margin excluding carried interest and transaction fees of 63 basis points. That was a reduction of 3 basis points from 2018, mainly due to acquisitions. In 2019, we generated GBP 3 billion of net inflows, which added GBP 16 million of annualized revenues. We expect our net operating revenue margin to reduce by 1 basis point to 62 basis points in 2020 due to the full year impact of Blue Asset Management. Remember, this is before potentially significant carried interest and real estate transaction fees. Next, let's look at our solutions business. Institutional clients are increasingly looking for us to help them meet their financial objectives by providing complete solutions. This includes partnerships with insurance clients who are looking for us to help manage their balance sheets over a life cycle. The flows here are often very large, and the portfolios can be complex, requiring an understanding of the client's risk profile. Our strong investment offering helps differentiate us, and we are one of only a small number of managers with the necessary scale and capabilities to manage mandates of this nature. At the end of 2019, we had GBP 143 billion of assets under management. Net operating revenues from solutions were GBP 226 million, and we had a revenue margin of 21 basis points in 2019. That was one bp lower than 2018. We expect this margin to decrease by around seven basis points in 2020, reflecting both the impact of the Scottish Widows mandate when fully funded and a pipeline of other notified inflows of over GBP 10 billion. The nature and size of these assets means they typically attract a lower revenue margin, but the incremental costs are low. As a consequence, the profit margin is similar to the group's overall margin. Importantly, the assets also have significantly greater longevity. It's these characteristics that make this business so attractive and why it is an important part of our growth strategy. Our success here creates a mix change. This is one of the key drivers of the revenue margin compression. That's why the additional information we are providing to you is so important. Our focus is on profits, and as I said before, the profit margin here is generally consistent with the rest of the business. So good growth across our three strategic priorities. Let's now look at our more traditional business areas. As you can see on the slide, these face more significant market pressures, starting with our mutual funds business. These vehicles provide access to the retail investment market through our intermediary relationships and continue to be an important part of our investment offering. Our mutual funds contributed GBP 735 million of net operating revenues in 2019, including GBP 3 million of performance fees. Although 2019 saw positive returns across financial markets, a risk-off environment persisted within this intermediated business, particularly within Europe. As you just heard from Peter, we delivered a resilient performance here with net outflows of just GBP 1 billion, and AUM ending the year up 8% to GBP 102 billion. However, we continue to see both longer-term pricing pressures of around a bp a year and mix changes impact our revenue margins. As a result, our net revenue margins, excluding performance fees, are set to decline by two basis points from 73 basis points to 71 basis points in 2020. Finally, to our new view of our institutional business. We have already talked about the growth we are generating from institutional clients through our private assets and solutions business. That's excluded here. The remaining assets relate to the index-related products we provide to institutions, either as a component of their overall investment strategies or as part of a supervised mandate. At the end of 2019, we had GBP 144 billion of AUM. That was up 7% from 2018, mainly as a result of strong investment returns. Net operating revenues were GBP 502 million, including GBP 40 million of performance fees. Equities have been an important part of this business. But as a consequence of the current market environment and as a result of regulatory changes, we have seen clients de-risk their portfolios and move asset allocations further towards lower margin fixed income products. We are also facing headwinds as clients increasingly move their growth assets away from public markets in search of higher returns. Bear in mind, this is the part of the growth opportunity within our private assets business. The net operating revenue margins, excluding performance fees, were 32 basis points, a basis point down on 2018. We anticipate the revenue margins for 2020 to be broadly similar to 2019. Going forward, you will continue to hear us talk about the results from these five business areas. I hope the additional information is helpful, and we will be happy to answer your questions. Well, certainly Alex will. As you take these on board and adjust your models, let us now return to our net income slide. As you have heard, our strategy is helping to offset the headwinds faced by the more traditional parts of the business. Targeted acquisitions that expand our capabilities are part of this. You can see acquisitions increased net operating revenues by GBP 21 million in 2019. That is mainly the acquisition of BlueOrchard, but also includes Blue Asset Management and the wealth management business of Thirdrock. Our associates and JVs are also an important part of our growth strategy. I have already talked about SPW as part of our wealth management business. Excluding that, our share of profits from associates and joint ventures increased by GBP 9 million. The growth was principally driven by the value created by our long-standing partnerships with Bank of Communications in China and Axis Bank in India. These are an important part of our strategy to grow in new geographies. They are principally consumer businesses and fit with our strategy of getting closer to our end client. Just to remind you that AUM and flows from these businesses are not included in the group metrics. The Chinese market represents a significant opportunity for us and is also an area of continued investment as we build our footprint in light of the more open regulatory environment. Thanks to our partnership with Bank of Communications, we are already well-positioned with a recognizable brand presence through our 30% interest in a co-branded asset management company. That business generated GBP 4 billion of net new business in 2019, and at the end of the year, had GBP 55 billion of AUM. We have evolved the product sold by the business over the last few years. This has resulted in a significant increase in revenue margins from 18 basis points to 24 basis points, and that has translated into increased profits. In India, we have adopted a similar strategy, this time with the third largest private sector bank, Axis. We have owned 25% of their asset management business since 2012. In that time, AUM has increased from GBP 1 billion to GBP 14 billion, with GBP 5 billion of net new business won in 2019. Historically, we have not talked about these businesses. But increasingly, they are an important part of our strategy, both from an income generation perspective and also as a platform to some of the fastest-growing economies in the world. To wrap up on revenues, other income also increased by GBP 8 million, thanks to good returns from our investment capital, seed capital, and co-investments. Bringing all of that together, we had net income of GBP 2.1 billion, which is marginally up from 2018. That is it on revenue. Now let us turn to costs. At the half year, we increased our comp ratio to 44%. That is still below our target range of 45%-49%. It represents a return to the level we had prior to recognizing an accounting benefit for material risk takers in 2017. Turning to non-comp costs, these increased GBP 37 million to GBP 496 million, which is in line with the guidance I gave you at the half year. The increase from 2018 was driven by four things that I talked about at the half year. Investment in technology and the development of our Benchmark Capital platform to support our new JV. Higher accommodation costs, including the impact of the new lease accounting standard, IFRS 16. Acquisitions and FX. Our technology investments over the past few years mean we now have a sophisticated, scalable platform. This is key given the changing product composition, and is a competitive advantage as we look to grow the business. Having made these significant investments in our IT infrastructure, we are now able to reduce our project spend to more normalized levels. Going forward, we expect spend to be targeted around new strategic opportunities. As a result, we expect our cash spend on technology to reduce by GBP 35 million in 2020. That's cash spend. Remember, the accounting rules require us to capitalize costs, so this won't translate to immediate reduction in expenses. Also, as you will understand, a proportion of our non-comp costs are variable based on the level of AUM. We therefore look at our cost as a percentage of AUM. This percentage increased as we invested in our systems and technology over the last few years. But as you can see on the slide, I am anticipating our expenses as a percentage of AUM returning to more normalized levels. In 2020, I anticipate our non-comp costs may increase to around GBP 525 million due to the full year impact of acquisitions made in 2019, and the depreciation of our intangible technology asset. As always, our overall focus remains on careful management of our total cost. Turning to capital, we continue to maintain a strong capital position with total capital of GBP 3.8 billion. That's up GBP 230 million from last year. The main driver of the increase is the GBP 154 million gain we made following the sale of a 19.9% interest in our Cazenove Capital business to Lloyds Banking Group. We cannot recognize this gain in the income statement under accounting rules, but it does increase our retained profits. From a shareholder perspective, it represents us realizing value from the business and is a distributable gain. Our regulatory capital requirement is largely unchanged this year, and after allowing for the final dividend, our capital surplus is GBP 1 billion. Overall, we continue to maintain a strong capital position. In summary, we have delivered a resilient performance despite the ongoing industry headwinds. This is thanks to the progress we've made and continue to make towards our strategic goals. I now hand you back to Peter. Thank you, Richard. Just quickly on the outlook. I think there's three things. One is the traditional business, Richard's talked about it, we've talked about it, I don't think we see any change in the direction of travel for the pricing environment and mandates. We start with good investment performance. That will be key in terms of winning new business, but those headwinds will continue. The second area is coronavirus, which we've got to talk about. I don't have an answer to the long-term impact, but I'd say two things. One is we've seen central banks getting aggressively ahead of the problems and the gyrations in markets of late are testament to that. But the impact on economic activity, to my mind, is going to be very clear. It's going to cause and is already causing quite big dislocation in stock outlooks. There is a silver lining in that for an active manager. You get paid for thinking. I think from my perspective, whilst we're going to see a lot more turbulence, you are going to see opportunities for active managers to really differentiate themselves. I should also comment that our resilience in terms of our ability to work on a split office basis has already been tested in Asia. We're offering most of our offices in Asia working on a split basis where key staff don't come into contact with each other, and that's worked incredibly well. I think that's an important part of being able to operate in what's going to be a difficult environment. Key to the outlook, to my mind, is the growth we've talked about in the core strategic areas of growing in wealth, growing in private markets and alternatives, and growing in solutions. If I look into next year, the future growth of those is already in good stead. I feel confident about the strategic delivery being able to continue to come through year-over-year, 2021 over 2020 as well as 2019 over 2018. We've got quite a few people online. In terms of Q&A, I suggest we start on the floor and then we'll go to all the online questions. If I could ask you to give your name and your firm when you ask a question. Thank you. Good morning. It's Arnaud Giblat from Exane. I've got three questions, please. You highlighted during the presentation that a big part of the drop in revenue margins per asset category was due to mix. At constant mix, what is the change in revenue margin per category, please? At constant mix. Richard, do you want to- I think, Arno, it is fair to say that if we strip out mix changes, the one big change that we have been talking about for the last five years is probably what we have seen and we will continue to see for the next few years as well. Okay. The underlying attrition is one bit. Okay. My second question is on M&A. Obviously, that has helped in terms of growing your private asset business. How are you seeing the market there? Are there opportunities? Some of your peers are talking about being quite active there as well. It is important that we find new capabilities. What we are not looking to do is put together other traditional businesses and take out costs. We would say our strategy is quite different from some of the other quoted firms that are pursuing that strategy. You are right, though, in private assets and in wealth, we have been very willing to add relatively small bolt-on acquisitions in order to create that new capability. We will continue to do it. I think that the acid test is the valuation acceptable? Is there a good cultural fit in terms of the people, and can we see good follow-on growth? Thus far, we have been able to find a dozen or so businesses that fit that mold, and we will stay alert to other opportunities. I think that the slight caveat I would give is that valuations in some areas are quite extended, and I think in private debt, which has been an area that we've looked at for some considerable time, I think we're going to see quite a lot of stress in that area. With a combination of coronavirus and low covenants, you're going to see a moment in time where there may be some opportunities, but it will be slightly more distressed than it has been hitherto. So we're very much on the lookout, but only if we can satisfy the three criteria: valuation, culture, and follow-on growth. That's great. Thank you very much. Thanks. You got Mike Werner here. Sorry. Oh, you got Mike. Go ahead. Got Mike here from UBS. Thanks. Got 3 questions. I guess first, a couple of years ago, 2 or 3 years ago, you talked quite a lot about the investment into the data insights team. Yeah. I was just wondering if you could give an update there, let me know what you think about in terms of growth from a headcount perspective going forward. Second, one thing I didn't hear much about during this presentation was really with regards to ESG. I was wondering how you are implementing your ESG strategy into, and in particular, the different new segments that you have described today. Then finally, I guess a bit of a follow-up on the M&A. With regards to private assets, you mentioned private debt as being a particular area of interest, should you see distressed scenarios. But what other capabilities do you think that Schroders is missing in the private market space? Okay, excellent. I'll try to take those. Data insights has been a really important part of improving the quality of alpha. So we've got 2 groups now. We've got a centralized group, which is of the order of 25 or so people, which sit in the middle of the investment floor, with a view to trying to interrogate alternative sources of data. An easy example would be if you look at our brand database, round numbers, it's 30 billion rows of data. It's not something that you want to put on a portfolio manager's desk and ask him to get any insights from. You need a data scientist to do it. So that's been around constructing a data lake. There's also now a much bigger embedded group of technologists who sit on investment teams to help generate better thinking, whether they be geospatial experts or data engineers. That's an ongoing reskilling of our population. But I think the biggest area, if I'm honest, it leads into the second question you raised, which is around ESG, that the one area we believe we can differentiate ourselves significantly is on ESG data. I think there's a lot of hand-waving in that sector, but the reality is we're going to have to be driven by data, and that's going to come from alternative data sources. So the significant investment we made in data science is being directed a lot at how do we get better ESG insights. For me, that is and I should have talked more about it because it's a really important new battleground. We've got a leading position in it. We've made a commitment as an investor to have 100% integration of ESG thinking into all of our products this year. As a business, we've made a commitment to be net zero in carbon this year, because we think that's the right thing to do. We're very engaged on the governance side as well as on climate, and as well on social issues like modern slavery. The bottom line is that our clients now care as much about how you invest as the returns you get from investment. If you can demonstrate that both through good technology and good data, you're going to be able to differentiate yourself. That's very different from using rating agency data to say what's good and what's bad. There's a good article in today's FT on exactly that subject. To my mind, it's a critical thing for any asset manager to be successful, and it's been an important part of our growth is being able to address that directly, both through specific ESG funds, but also greening the whole system. We see greening the whole system as the key answer. Finally, your third question on M&A. Debt is the one major area. I think there are more opportunities in real estate. I think our real estate capabilities are quite European-centric. If I look about what might be done, we don't do much in real estate debt. We don't do much in real estate outside of Europe. So that would be a nice to have. The core ingredients are there. I think if you think about what we're serving in terms of the solutions business is, how do you answer an insurance company's big long-term interests? How do you answer pension funds liability matching issues? So long leasehold issues as a good match for liabilities is a great place to be. Can we use more of our expertise in real estates and hotels to satisfy pension fund issues? Those are sort of niche things, but they're nice 20-year sticky money, which has been an important part of our thinking. So it's across the whole spectrum, but we feel we're in a much, much better place today. I should just touch on finally, on BlueOrchard, a little bit more. That, for us, was a game changer because what it does is the development agencies are often the largest investors in having impact today. What we're going to see is a very significant move of private sector money, insurance money, pension money, high net worth money, wanting to have positive impact. The moment we talk about ESG, we'll soon start talking about impact. We've got the world's leading firm who've written most of the standards now in the group. I think for me, that's a really important part of being at the forefront of impact investing. You can argue other firms are there, but I feel really confident that the BlueOrchard is a game changer in terms of being able to open up that new market. Thanks. Good morning. It's Hubert Lam from Bank of America. Three questions. Firstly, on comp revenue ratio, it was 44% in 2019, wondering what your forecast or target is for 2020? That's the first question. Second question regards to Schroders Personal Wealth. Again, what are your expectations for this year? I think last year you had a big boost in flows mainly coming from Swift. What are your expectations in terms of flows as well as earnings for this year and maybe next year as well? Lastly, on the coronavirus. I know it's very early days. I'm just wondering how your clients been reacting. Are they panicking? Are they selling their assets, or are they mainly staying on the sidelines just waiting for things to calm down first before doing anything? Just wondering your thoughts. Great. Richard, comp revenue? In terms of comp, no change. Sorry, I should have mentioned that. So 44% this year, 44% in 2020. I just perhaps should add that we took on a large number of staff both to onboard the Swift mandate and to upgrade the Benchmark Capital capability. That was funded by the increase, but we don't see that needing to go up again. Yeah, that's right. This is a sort of timing mismatch. A lot of the costs came on in 2019. Yeah. SPW's had a good start. The focus is very much on how do we retool advisors? How do we create a new technology platform in order to really boost the productivity of the advisor network and make the most out of the Lloyds referral business. At the moment, the focus is not on how do we drive net new business. How do we create a really good proposition with strong bank advisors with the right tools? That uplift in productivity will give us a very big step up. I think, Rich, do you want to talk to the numbers for earlier? Well, there's more than one component of revenue. I touched on one, which we saw GBP 13 million of revenues from October. Annualizing that, multiply that by four, and you'll get an idea of that source of revenue. But within Benchmark, we've also got a platform fee. There will be strong growth in Benchmark revenues as a result in 2020 over 2019. Coronavirus. I do think it's very early days. What we haven't seen is capitulation. If you think that we had a market which was down 11% last week, in normal circumstances, you would expect to see outflows. If I look at our mutual fund flows through to the end of last week, actually Asia and Americas were actually still positive. The U.K. and Europe were in slight outflow, but we're talking about rounding numbers. I think you would expect to see a few leads and lags, but I think early days. I think in equities, it's quite easy to see across the valley. We do know that the world will return. It's just going to be an uncomfortable period for all of us and our families. But I think in debt markets, you might see a bit more of shocks, because actually if you've got leverage in the system and you've got cash flow covenants, a big step change in trading is an issue. But we're not seeing it in flows markedly at all. Tom. Sorry. Sorry it wasn't going to be worth all that wait. Tom Mills from Jefferies. Sorry, I forgot. I just wanted to ask a question. You spoke about the importance of asset longevity, and you've got that impressive improvement. I was just wondering how much of that improvement has come from the mix shift changes in your business and the growth in solutions, and how much is sort of underlying better retention of clients? Because I guess you're kind of struggling, and you've struggled for a few years now on the institutional and mutual fund side of the business, and just wanted to understand how those dynamics were working. Yeah, I'd say two things. One is if you look at underlying market longevity, it's quite clear. If you look at longevity of U.K. mutual funds as a statistic which you can get quite good numbers on across the industry, I would say it's declined by about a year, say from three years to two years in a relatively short period of time. And against that, we buck that trend. So it's quite important that you Part of it is the service you offer and the performance you offer, and you can't escape those factors. But that line's been coming down actually over six years, irrespective of the strategy. But you would expect it to come down more quickly as you do more private assets, more solutions, and you get more locked-in revenue. But I see this, the industry benchmark, I think is, if anything, it's shortening. Thank you. Sorry, just one more question on the private market side of the business. I know you're talking about fee margin compression as a result of acquisitions there, but beyond that, are you seeing more stable fee margins in that part of the business? On a like-for-like basis, absolutely. Very robust pricing environment. I think where you do see mix, if we grow our securitized credit business or we do more real estate partnerships, which tend to be up-front transaction costs and a relatively low fee for a long period of time, those are mix changes. But that fee, if you like, is not really changing at all. Perhaps I should add, on revenue margins that I talked about, that was post-transaction fees and performance fees, that 63 basis points. If I had those back for 2019, it would've been 76. They're harder to forecast. But the nature of those business, they do come with more significant other revenue streams. So 63 might sound low, but add on those other revenue sources, and what we saw this year was 76. It's helpful. Thank you. Are there any more questions in the room? Else we'll go to the ones online. Catherine, we have any questions online? The first question is from Bruce Hamilton at Morgan Stanley. He asks, "Is there an intention to take a majority stake in the Chinese JV? Is there any other color we can give on the China plans going forward? No, there isn't an intention to take a majority stake. Our joint venture is working very well, and we feel it works for both parties. I think importantly, the point we haven't made, but it's worth just making, which wasn't Bruce's question, but I'll make it anyway. Our one, three, and five-year investment performance in the JV is absolutely excellent because they've been good at staff retention. We're seeing some very successful fund launches coming through. I think that we've got to a good place where you can keep investors, grow good investment performance. That's because we've had stable ownership and the good backing from both parties. We're very comfortable with it as it is. Thank you. The second question is from Haley Tam at Credit Suisse, who asks, "Can you tell us how much of the profit contribution in 2019 came from businesses that were acquired in the last five years, and how that outcome looks from a return on invested capital basis? I look at Richard at this moment. Thank you, Haley. I'm going to have to calculate that. So if I can get back to Hailey. But I haven't got that number to my fingertips. What we do know is we did a review for our board in terms of the IRR we've earned on those businesses, and all of them were good double-digit numbers, and all of them are seeing good follow-on growth. Yeah At least in line with our initial expectations. But perhaps Richard will come back with those. Yeah, I'll come back with a more detailed answer. But yeah, you're right. We saw high teen digit IRRs. Yeah. Sorry, I didn't answer the second part of Bruce's question, which was other feedback on China. Perhaps there's two things I should say is, we've got a number of other licenses in China, and plans outside the joint venture. We've also recently seen the PBOC come out with 11 new rules offering the opportunity to invest in wealth management subsidiaries. You should expect to see us doing more, both on the private equity side and on the fund launch side. We think strategically, China's the second-largest equity market in the world, the third-largest bond market in the world. A vast amount of saving going on and very significant alpha contribution. So whether it's inbound investment from overseas investors wanting Chinese alpha, big market, one where we've got a good position. Outbound for Chinese institutions wanting to invest in the rest of the world. Good market, we've got a good position. Then China to China, again, where we're getting the right licenses. We've got some of the right licenses already. Again, we see good growth. So that's all over and above our position with the JV. Thank you. The next question comes from Paul McGinnis at Shore Capital, who notes that the dividend payout rose from 53% in 2018 to 58% of pre-exceptional EPS, but is asking for clarification of the policy going forward in the event that falling markets have an impact in 2020. Well, our policy's unchanged. It's a progressive and sustainable dividend, targeting a payout ratio of around 50%. But being progressive, we don't anticipate the dividend declining. Thank you. The final question from Gregory Simpson at Exane BNP says that, "Noting that 68% of AUM outperforms over three years, does investment performance vary significantly within the different segments, such as private markets? There is a slight difference across segments. If you look at our private markets performance, it is very strong indeed. Our fixed income performance is very strong indeed. Our equity performance is slightly lower, particularly over one year at 61%. You would expect that from a house which has a slight value orientation when you are in a growth market and you have very narrow markets. Particularly a drag on that is any quant-orientated strategies which are having a tough time when markets are so narrow. But the helpful bit is our performance is in the areas of the market which are in demand at the moment. Thank you. That concludes all the online questions. No more questions online. Any more questions from the floor? Great. Well, thank you all very much, and thank you for staying a full hour. Thank you.