Good morning, everybody. It's 09:00, so we'll make a start then. Welcome to the Schroders Half Year Results for 2019. We're going to follow the normal pattern. I'm going to talk a little bit about the overall numbers and flows.
Rich will then give some financial detail, and then we'll come back and take any questions that you might have. For the first half, I don't think there's much in these results which will surprise people in this room. We've continued to invest behind the strategic initiatives we've talked about, particularly private assets and wealth. We've continued to work hard on our Lloyd's joint venture. We'll talk more about that, but that's made very good progress in the period.
And clearly, the first quarter of the year was very tough from a risk off environment. But actually, over the period, we've seen, I think, small number of outflows considering the environment, but we'll come back and talk more about that. So if we look at the overall numbers during the period, our net income was down 5% to £1,032,000,000 Markets during the period were down on average 2%, which was the key driver of that. In fact, markets rallied very strongly towards the back end of the period, but it was very much a MayJune effect. So the assets under management at the end of the period were actually GBP444 billion, which was up 9% over the start of the year that's over the start of the year.
And basic earnings per share at 98.6p. If we just dig into the detail of that by flows, I've got the normal chart that you've seen before. Breaking it down into three sections: Intermediary saw outflows of £2,400,000,000 Institutional saw inflows of £300,000,000 and Wealth of £900,000,000 Just to give you a little bit more color on each of those. The main drivers on the Intermediary outflow of 2.4 particularly Continental Europe, which saw flows out of £1,700,000,000 The other major feature of that was outflows from equities of £4,000,000,000 We also saw outflows in The UK of £600,000,000 You'll be familiar that we had two very long standing fund managers in Andrew Rose and Jenny Jones, who retired at the start of the year. So actually, although we saw outflows in The UK, I think that was a good outcome considering the significance of those two portfolio managers, the UK team did a very good job through that.
The institutional flows were much more resilient despite the risk off environment. We saw inflows of £300,000,000 We still saw equity outflows of GBP 3,200,000,000.0, and that's an important number to come back to, but inflows in multi assets and fixed income. And the other big feature of that, there was a very strong move in The UK towards risk mitigation product. So that's Institutional saw an inflow. And we've talked about the resilience of wealth flows in the past.
And again, we saw inflows there, follow on growth both in Schroder Wealth, an inflow of £500,000,000 and in Benchmark, an inflow of £400,000,000 So the sum of those adding up to an outflow of £1,200,000,000 If we just look at it through another lens and look at it by region, you can see the real contrast there. Very strong inflows in The U. K, pounds 3,600,000,000.0 in, made up of wealth and particularly those strong fixed income and multi asset inflows, particularly around risk mitigation. In Europe, we saw the largest of the outflows of the £2,700,000,000 The largest part of that was the intermediary outflows of £1,700,000,000 Particularly Europe saw a risk off environment. Italy, Spain, Switzerland, main markets that you would expect to see in a risk off environment.
Conversely, we saw inflows in more stable countries like Germany. Asia, we saw a small outflow of £900,000,000 The normal features of that, actually, we saw positives in China, in Taiwan and Singapore, and we saw £1,100,000,000 out in Australia. Those growth those outflows we talked about before are slowing down now, nevertheless, still a small outflow in Australia. And then an outflow in The U. S.
Of £1,600,000,000 predominantly on the institutional side, and that was two or three institutional mandates. Still, we saw inflows into the Hartford fund range, which was pleasing. And actually, in a competitive position, Hartford still continues to perform very well in The U. S. Context despite flows in The U.
S. Being really quite muted during the first half of the year. And then finally, we look at this by asset class, you can see the very dominant impact of equity outflows from the risk off environment, outflows of £7,200,000,000 split £4,000,000,000 outflow on the intermediary side and 3,200,000,000.0 on the institutional side. Good inflows in fixed income, pounds 3,200,000,000.0, 1,700,000,000.0 of which was intermediary and £1,500,000,000 of which was institutional. Wealth management inflows, we've talked about, and a small inflow in private assets.
But fortunately, we saw one big outflow, which was a Continental European institutional mandate, particularly sold in The Nordics, which was our central office fund, which was about £800,000,000 So that's rather muted the private assets performance, which was otherwise pleasing. The equity number, clearly, the big feature of that page, which has an impact on margins as well as on flows because clearly equity products are high margin. And Richard will talk about the financial impact of that. But the flows really were pretty broadly based. I mean we saw a risk off across all product areas from emerging markets, Asia, QEP, right the way through.
The one standout feature was our global equity team who saw strong inflows and more growth bias some very good performance there. So that's the three lenses on our flows. What I'll do at this stage, I'll hand over to Richard, and I'll come back and we'll talk more about strategic developments. Thank you.
Thank you, Peter, and good morning, everyone. As you just heard, we have continued to focus on delivering our strategy in H1 with complementary acquisitions in our private assets and wealth management businesses and good progress towards the start of the Lloyd's mandate and the launch of Schroders Personal Wealth in the second half. These are important developments and part of our response to the industry headwinds that Peter and I have talked about, which continue to play out as expected. So let's start with the headlines from the twenty nineteen half year results. Profit before tax and exceptional items decreased by 14% to GBP $340,000,000.
The main driver of the decrease was a GBP 54,000,000 reduction in net income, which I will come back to shortly. Operating expenses were GBP 3,000,000 higher than H1 twenty eighteen as lower comp costs were offset by the forecast increase in non comp. Exceptional items of 21,000,000 returned to a more normalized level and mainly relate to the amortization of intangibles. We're expecting exceptional items of around GBP 50,000,000 for the year as a whole. After exceptional items, profit before tax was GBP $319,000,000.
Tax is also an important part of our return to shareholders. Our pre exceptional tax rate reduced from 20.5% in H1 twenty eighteen to 19.8% for the first half of this year. And that's my best guess looking forward for the whole year. Basic EPS was down 14% to 98.6p before exceptionals and down 13% to 92.4p after exceptionals. In line with our policy, we have kept our interim dividend unchanged at 35p per share.
Now let me go through the movement in net income. Net operating revenues decreased by GBP 58,000,000. As always, the movement is driven by markets, including market margin attrition, FX, net new business and acquisitions. Average AUM for the period was 2% or GBP 11,000,000,000 lower than the first half of twenty eighteen. That's the combined impact of markets and FX.
It comes despite market strengthening towards the end of the period, with AUM closing H1 twenty nineteen at a new high of GBP $444,000,000,000. The impact together with margin attrition was a GBP31 million reduction in revenues. Net outflows over the last eighteen months decreased revenues in the period by around GBP23 million compared to the first half of twenty eighteen. That was partly offset by the impact of acquisitions, which increased net operating revenues by GBP 4,000,000. That's principally the impact of Algoquin, which we acquired in May 2018, but we are also starting to see the benefit from the acquisitions we completed in the first six months.
To be clear, the GBP 4,000,000 is the period on period increase. In total, the acquisitions we have made over the last three years have contributed over GBP 120,000,000 of annualized revenues. Finally, we generated GBP 27,000,000 of performance fees in carried interest. That's down GBP 8,000,000 compared to the same period last year. As I mentioned in March, these revenue streams are difficult to predict, but we continue to budget for around GBP 50,000,000 for the year as a whole.
Now let's look at it by segment. Starting with Asset Management. Net operating revenues were down GBP 58,000,000 at GBP $853,000,000. The decrease includes the impact of lower average AUM, which was down GBP 12,000,000,000 on H1 twenty eighteen. Net operating revenue margins were also down by around one basis point.
Net outflows over the last eighteen months of GBP 13,300,000,000.0 resulted in reduced annualized revenues of around GBP 82,000,000. That includes a reduction of CHF43 million from flows this year and is principally a result of the current risk off environment with net outflows in higher margin products. 27,000,000 of the reduction over the last eighteen months is included in these results. Now let's look at net operating revenue margins by channel. Our guidance here excludes any impact from the Lloyd's mandate.
As you have just heard from Peter, around GBP 45,000,000,000 of this will fund in H2, but the take on will mainly be towards the end of the year and will not have a significant impact on this year's results. I will provide guidance on how you should look at it going forward in March. For Institutional, excluding performance fees and carried interest, margins were unchanged at 31 basis points. That's in line with the guidance I gave you, and we still expect the margin to be around 31 basis points for the year as a whole. Turning to Intermediary, revenue margins have fallen by one bps point to 70 basis points.
This is just a little lower than the guidance I gave you in March and reflects the risk off environment that I've just mentioned. We may see it come off a further 0.5 basis point in the second half as the effect of the mix changes we have seen in the first six months continue to come through. So in total, Asset Management revenue margins have reduced by a bp to around 44 basis points. Now let's look at Wealth Management. Net operating revenues are in line with H1 twenty eighteen at GBP140 million.
Although we have generated higher management fees, the increase has been largely offset by lower transactional revenues. Focusing on the chart to the right, this shows sustained growth with GBP 11,000,000 of annualized revenues generated or net inflows of GBP 2,600,000,000.0 over the last eighteen months. Importantly, and in contrast with Asset Management, we have a tailwind from these net inflows, which will add to our revenues in H2. We also see future growth opportunities from Schroeder Personal Wealth. Revenue margins, excluding performance fees, were 60 basis points, which is one basis point lower than 2018, but is simply due to the lower transactional fees I mentioned.
We expect margins to remain around 60 basis points for the full year. That's it on revenue. Now let's look at what's happening to our operating costs. Comp costs continue to be the biggest component of our cost base, making up 66% of our total costs, and they were down GBP 19,000,000 or 4% compared to the first half of twenty eighteen. That's despite the slight increase in our comp ratio to 44% for the half year.
We held back the ratio last year, but the impact of market conditions and FX have continued to be challenging. And as you've just heard, we are continuing to invest in the businesses, which will drive future growth. This includes the build out of our benchmark platform in preparation for the Lloyd's mandate and ongoing developments of strategic priorities, where we are looking to build scale, including within private assets and in China. Whilst the ratio is higher than I guided to, it is in line with the ratio we had prior to recognizing the accounting benefit for material risk takers in 2017. That benefit has now gone.
Non comp costs were up GBP 22,000,000 to GBP $239,000,000, in line with our guidance. The increase is mainly driven by four things: first, investment in technology, including ongoing work to decommission legacy investment platforms following the rollout of Aladdin and the investments we're making in the Benchmark platform ahead of the launch of Shredder Personal Wealth second, the impact of higher accommodation costs largely as a result of IFRS sixteen third, acquisitions and finally, the further impact of FX. But let's remember that 65% of our revenues are generated outside of The UK, so a weaker sterling increases our revenues profits. We are now expecting full year non comp costs to be around GBP $495,000,000. The only changes to my previous guidance are the additional costs from the acquisitions we have announced in the first half plus the change in FX.
Now let's turn to the last section on capital. We are continuing to make our capital work harder. We have made further investments in the development of our new products, which mean our seed and co investment capital has increased to CHF $567,000,000. And as you've just heard, we are continuing to invest in selective acquisitions that expand our capabilities, particularly in private assets and wealth management. Despite these investments, we continue to maintain a strong capital surplus of GBP 1,200,000,000.0.
So in summary, you can see that our results are in line with expectations and with our guidance. And just as importantly, they continue to include strategic investments in the future growth of our business. With that, I'll hand you back to Peter.
Thank you, Richard. Just perhaps a couple of words on strategy before we go to Q and A and an outlook. First thing to say is that during this period, we've made three acquisitions. And to head off the questions, let me just take those head on now. Third Rock was a very small business, for me, gave us an adviser force in Asia in the wealth sector.
Clearly, a very fast growing area. We felt that, that was a it was a good way of getting scale there quite quickly and has been integrated. It was a relatively straightforward transaction. Two acquisitions in private assets: One Blue, which is, again, a German real estate business, assets under management, about £1,700,000,000 really a team based in Munich that does operate through the DACH region with a very blue chip client base, doing value add investments, particularly in the shopping area. For us, it was a classic acquisition of bringing the team with a capability and then scale it over time.
Blue Orchard, I think, a bigger and altogether, different acquisition because it takes us into a whole new area, that's impact investing. And we've been very clear that we see a very significant opportunity for this industry to align itself with the world saying, actually, we want to invest and to have a social benefit at the same time. And we've made some very strong statements about integrating ESG throughout all of our investment processes over by the end of twenty twenty. Impact investing is the tip of that tuning fork where you can measurably see a good at the end of it. And we've Blue Orchard is the leader in that area.
This business set up twenty years ago with very significant infrastructure on the ground, very closely aligned with development agencies. So as development agencies withdraw from this market and private capital moves in, it's a very exciting business, and one where it's not just about, the growth we see in microfinance, it's about the connections with that world and the IP that they bring with it and the boots on the ground. So three important acquisitions, but particularly Blue Orchard, I think, takes us into some really fast flowing water. Secondly, on the Lloyds joint venture, two things there. Really, we're expecting the tranche plan of £45,000,000,000 of inflows this year, and the balance of the assets will flow in the first quarter of next year.
They'll flow predominantly through the fourth quarter. So as Richard indicated, it's not really a modeling issue for this year, but will be a modeling issue for next year. The second thing is the joint venture in terms of wealth. That's made very good progress. The business has been stood up.
The regulatory approvals, primary set have been acquired. The transitioning of clients onto the Benchmark platform is underway. It's a steady move across. And as we get more confidence in systems, we'll speed that move across, but that's already underway. And I think that's remarkable progress considering this was announced in October.
The business has been stood up, branding done, systems in place and transition underway. Clearly, the build out of adviser numbers and training new advisers and connecting them into the network is going to be the next thing, so far so good in terms of the build out of that business. The final point to say is I think we've had a risk off environment. In terms of the outlook statement, I think, alludes to two things. Alluded to two things.
One is clearly that that environment was predominantly for the first four months of the year. Think we've seen that ease up somewhat now. If we look at our pipeline of business, it feels good. I mean you never very early in the quarter, I hate making predictions, but right now, it feels as if we've got the wind at our back with the starting assets where they are and the known winds we've got. But for me, we've got to focus on getting the strategic growth in the business.
We see the trends. Investing behind those is key. I'll give you one example before I finish, and that's China. Very very uncommented on announcement by the Chinese prime minister, earlier this quarter, which was about the, ending of the one plus one rule. Well, for us is absolutely mission critical.
We've got a really good joint venture with Bank of Communications, but we also wanted to grow our own business in China. The ending of the one plus one rule strategically for us was a really important step forward in being able to build our own business in China alongside the joint venture. So that investment continues. And I think that organic growth will be absolutely key. So as we harvest costs on the one side, we're reinvesting those quickly into these new growth areas because we see that as the future opportunity.
With that, I'll stop and throw it over to our diminished numbers, what LSE has done for the numbers today. Most of your colleagues are over there, but happy to take any questions. If you could give your name and firm when we when you do, that would be great. Thank you.
It's Hubert Lam from Bank of America Merrill Lynch. Three questions. Firstly, on Australia, you already had $1,000,000,000 of outflow in the first half. Just wondering how big the book of Australia is today and what do you think is at risk just given the circumstances there? Secondly is on flows.
Flows have been, I guess, pretty modest over the last few years. 2017 markets were good and you had about 2% annualized growth. Last eighteen months have been seeing outflows. I'm just wondering if you consider this mainly to be due to cyclical headwinds or do you see structural challenges making growth lower? And in normal world, what would you say your run rate growth can be?
Do you think you can still achieve a mid single digit net new money growth? Third is on the debate on liquidity and funds. Just wondering what your views are on this debate. Do you think that these are big risks in the market? And do you expect any regulatory change on the back of this?
Great.
Thanks, Hubert. Let me try and deal with those, and Rich will come in with any additional comments. Australia has got our book of business in aggregate in Australia is about £15,900,000,000 of institutional assets, which is has been the core area. You've seen the Royal Commission. You've seen some very major changes amongst super funds.
And you've clearly, we have a more value orientated team in Australia, which hasn't been a comfortable place to be given the narrowness of markets. As I said last time, I feel that the business is in reasonable shape. I don't expect to see an acceleration of outflows from here. Never say never, but I think we've lost a lot of the money that we would lose. And I'm more confident going forward, but we've still got a book of £15,900,000,000 on a market which is tough and changing.
On the industry outlook, I mean, I there's lots and lots of dynamics clearly going on here. There's a passive active thing, and you're seeing, obviously, strong growth in passive. But equally, that's not that's loss of revenues to the industry because industry revenues are under pressure. You're seeing pricing dynamics in active funds. So the read across, as we see in these figures, is not direct between AUM and revenues because you've the pricing points that you're achieving.
And those trends are most common in equities, clearly, and that's a big part of traditional asset management world. And then on the third side, you're seeing some new markets. And I think those are really important. And I think the biggest gift to active managers has been the Chinese market, the second largest market in the world, a huge source of perspective alpha. And you're going to see many, many more people wanting to diversify in to get the returns that are available from that alpha in China.
So it's not a one way traffic. I think growth has been muted, but we're going through this transition of building up our private assets business and building up our wealth businesses. And as those get a larger portion of the group, the growth in those get ever stronger. So our private assets business today has reached £40,000,000,000 It's come a long way. Our wealth business, as you saw, is over £50,000,000,000 And those have got very positive dynamics.
And so the overall mix, it's whether it's mid single digits, think, any one period will depend on the points of the cycle. But I feel very good about the underlying growth dynamics of our business because we've invested in the fast flowing positive areas. And we've yes, we're seeing outflows in the other, but part of reshaping the business to put more emphasis on different products, more emphasis on new regions, more emphasis on private assets, is that you can achieve that long term growth, and that's exactly what we're doing. And you had a question on liquidity and Woodford. I'd make a couple of comments.
I think the first thing is that the the Woodford funds were bought by a different by by a DIY investor, and they were bought, you know, effectively through lots of lots of newspaper comment direct, not through advisers. So the market that we serve tends to be the intermediated market through advisers. We've always taken a very, very strong quality first view. And the quality first view says, we didn't have a property fund that was bricks and mortar in 2016 when the gating's happened there. Ours was quarterly with ninety day notice.
We don't buy on quotas for any of our funds. The largest overlap we have in any of our funds with Woodford fund is only 2% of our assets, so 2% common holdings between. So we buy a very different sort of company. And I think we've also worked incredibly hard to make sure that we close funds at capacity. And so if anything, would say the impact of it, whilst it's not comfortable for the industry to be put in the spotlight, within that, there's a flight to quality.
And we've positioned ourselves at the quality end. And yes, it's painful to close funds and not take more capacity. But But actually, it's the times like this where you're glad you did. So I think in a world where there's a lot of free money, there's a lot of people reaching for yield, reaching for other things, it's been right to be cautious. That seems to be being vindicated.
Question, do do we expect any regulatory impact? I think that Andrew Bailey has has been on on record at the front of Treasury Select Committee saying that, you know, the what what happened was that gating is a perfectly legitimate response. I think there's going to be a look at the role of ACDs and the independence of ACDs. I think that's inevitable. I think there will be a look at, I mean, you're seeing the impact of it now with the listings on stock exchanges, don't transpire to be what we would perhaps normally consider to be a listing.
So you will see those things. I think the regulators actually were ahead of this insofar as the SM and CR regulations, which come in, at the back end of this year, will deal with all of those issues because the obligation will be on firms to make sure that whatever the rules say, you're doing it appropriately within the firm. So I think that from a regulatory perspective, the action is being taken and it's being implemented. But there will be some small changes, I think, around ACDs. Any more questions?
Yes, this one over here.
It's Greg Simpson from Exane here. Just three questions. The first would be on private markets. The flow this half was distorted by that mandate. Was wondering if you could give us an update on the Advec acquisition and the assets and flows there and how the efforts are to promote Advec to the broader institutional client
base
you have? And then the second question on costs. You mentioned in the fixed costs, there are some decommissioning costs from legacy systems. Any idea of the quantum of those? And is there a level of dual running costs that could drop out at some point maybe next year?
And then just a quick follow-up on costs, the proportion of costs that are in sterling would be helpful. Thank you.
Great. Thanks, Greg. The just let me I'll start with the private markets, I'll partner with the difficult questions to Richard. Advec has been has the acquisition is working well through the network. So previously, Advect's business was very much focused on Switzerland, Germany.
We've now started winning money in America, in Asia, which is basically a result of the Schroders sales force taking it out. We've built a dedicated, what we call the alternative sales unit, which is a different unit for selling private assets and alternatives, and that's been in place. I mean clearly, the sales of ADVAC, way we account for it is we only account for sales once we are receiving a fee. So if you have a commitment without a fee, we don't book that in our AUM or in our new business numbers. So there's going to be a lag on seeing those things come through.
But I think we've there's also, obviously, the timing of fund launches and fund closures is also important. But fundamentally, we think that the follow on growth from ADVAC is in line with what we hoped it would be, which is good. Richard, do want take the questions on costs?
Costs. Decommissioning costs, yes, that's the we are running duplicate systems. They are significant. But it's complicated. In that decommissioning, you don't really get the saving until they've all gone.
And one of our key duplicate systems is we've got an ABOR and an ABOR. And it's going to be some way into 2020 before we can deal with that scenario. So I wouldn't be banking a lot of significant cost savings coming through into the second half of twenty twenty. And therefore, you got a half year effect. So it's not going to move the dollar enormously, but they will they are tangible, they are real.
I think what's more important is that the new systems we are building are very scalable. And as our business grows, we should be able to deliver real cost synergies by not having to increase the complex myriad of manual processes that use support our legacy systems. So I think it's more about cost synergies in the future as we grow rather than a big bang in terms of we're going to turn something. You're going to see a lot of costs falling out. But there will be some towards the second half of next year.
But we've got a lot of work to do before we get to that point.
If I could add one thing there, Greg, is the other side of it is being able to do business, which we couldn't previously do. So I think at the moment, we've got, more than a dozen solutions mandates, which we've won and haven't yet taken on board, which are the pieces of business, which we're now able to do because we've got the technical ability to do them, which previously we'd probably walked away from. And I think that's a there's a cost synergy, but there's also a revenue synergy.
So it's really we built a platform that will deliver for us going forward and will deliver that scale benefit. In terms of your second one, I don't know the answer, but James is looking at it.