Earnings Call: H2 2018

Mar 7, 2019

Good evening, everybody. Welcome to the Schroders 2018 annual results meeting. For those of you who haven't been to One London Wall Place, welcome to our new home. We're going to follow a running order this morning, very similar to prior years. I'm going to talk briefly about the flows. Rich is going to take you through the detail of the numbers and the initiatives. I'm going to come back and talk more about strategy, and then we'll do Q&A. Overall, we were pleased with what was a robust set of results in what was clearly a challenging environment. Last year was characterized by a lot of important strategic initiatives. If we just take you through the headline numbers, clearly you can see that revenues were up 3%, profits down 5%, GBP 761 million, and the dividend up a penny to GBP 114 pence. Those are the numbers that you've got in front of you. What I'd like to do is briefly put that in a longer-term context. This meeting last year, we were at pains to point out that two things have happened. One is we'd earned more performance fees than we would normally expect to earn, and the second, that we'd had a one-off windfall from compensation that increased deferrals, which meant that the accounting charge for compensation last year fell and flattered last year's numbers. This year it reverses and hurts this year's numbers. So if you're to look through that longer-term trend, we think this is a resilient set of results. If we get into the detail of flows, I'll take you through each of the segments one by one. In the longer-term context, clearly this is disappointing. What this doesn't show, of course, is the GBP 85 billion of unfunded new wins, which we have announced the GBP 80 billion from Lloyds and another five which we haven't previously announced. So there are negative headwinds in here, but there's also some good areas of strength. What we saw here is if you just take the high level, wealth management saw a GBP 1.7 billion inflow, intermediary saw a GBP 4.6 billion outflow, and our institutional business saw a GBP 6.6 billion outflow. So a net of GBP 11.2 billion out in asset management, GBP 1.7 billion in, coming back to the 9.5. This is the breakdown by region. The Americas, as we've talked about in the past, we continue to see that turnaround in America. Here we showed GBP 2.5 billion of inflow, 2.2 of that was in the institutional channel. What was pleasing was a very broad array of fund areas that that money came into, particularly actually in equities, which was positive. The Hartford relationship, which we talked about before, brought in GBP 1.4 billion of assets. If you look in the league tables of U.S., that was a very credible performance at a time of pressure in the U.S. We had a one-off outflow, which frustrating in Mexico, of GBP 1.9 billion, which is in those Americas numbers. The U.K. institutional saw a GBP 0.6 billion inflow. There was GBP 0.5 billion out in intermediary, but GBP 1.7 billion in in wealth. So you can see that number coming in positive inflows in the U.K. EMEA, we saw an outflow, GBP 1.6 billion on the institutional side. Predominantly actually Middle East, which we count as Europe. There was another outflow in Nordics. The more important number there, though, is on the intermediary side, which was GBP 4.5 billion of outflow. Predominantly in those countries which are dominated by risk-off environments. Particularly, the two big markets which contributed to that was Switzerland, where obviously the big G-SIBs are based, and Italy. We did positive flows, particularly in Germany, which was very pleasing and it's an important market for us, reflecting a little bit of the work on private assets, and Asia-Pacific. Here the story, I think, is one of mature markets and growth markets. We saw the vast majority of that, 90% of that, 99% of that is institutional, GBP 6.2 billion of outflows in Japan and GBP 3.7 billion of outflows in Australia. The Australian issue we've talked about in the past, which is the pressure of that restructuring and the super funds moving themselves. The Japanese number was nearly all one client. We've had one very large client move their money out. I think one of the characteristics that we feel of the business at the moment is that we're winning very large mandates, but inevitably with winning large mandates, you're going to have lumpy outflows. We've had on both sides of the balance sheet, we had the potential a couple of years ago going out. We had very big inflows from Friends Life. This year we've announced the Scottish Widows transaction. I think the characteristic of that was we made very good progress in a lot of the other Asian markets, the growth markets. We saw those two big institutional outflows, which was a source of frustration. In terms of the balance of flow by asset class, I think that was much more pleasing because we're seeing rewards in the areas that we've been investing. Multi-asset saw a GBP 4.8 billion inflow, of which about GBP 4.5 billion was institutional. Importantly, good contribution there in the U.K. Private assets, we saw inflows across nearly all of our private asset strategies. GBP 2 billion of that was institutional, GBP 0.3 intermediary. Wealth management continued inflows, which again, is pleasing. Fixed income was where that outflow was in the institutional side in Japan. Broadly speaking, GBP 7 billion of the GBP 8.3 was in fixed income, institutional, and the balance was a small outflow in intermediary. Equities, the outflows there were characterized particularly by outflows in U.K. equities, which was a little over GBP 5 billion, and from quant strategies, particularly in Australia. The flip side of that is we saw very good inflows into Asia and emerging markets. There was very much a developed market outflow and emerging market inflow tone within the flows within equities. Lots of moving parts. As ever, very diversified business and we try and give you two minutes to summary the whole thing. It's not easy to do. Richard will take you through the revenue implications of all that, because I think what's important is that our overall gross margin held up well in the year, which was a reflection of the shape of money that was coming both in and out. At this point, I'm going to hand over to Richard, who'll go through the detailed numbers, and I'll come back and talk about overall strategy. Thank you. Thank you, Peter. Good morning, everyone. As you just heard, 2018 has been an important year for us. We have made good progress against a number of our strategic priorities, and we have delivered on some of our key operational objectives, including our new front office investment platform, which went live in the second half, and our move into our new corporate headquarters. These strategic developments have had an impact on this year's results, which I will explain in more detail shortly. Let me start by putting the results in context. This slide shows the normal breakdown of the movement in profits, which, before exceptional items and tax, decreased by 5% to GBP 761 million. Profit after exceptionals, again before tax, was GBP 650 million. Before we look at the results in more detail, there are two key points that I want to focus on, and Peter did touch on this. Firstly, the movement in pre-exceptional profits. Last year, I highlighted a couple of one-off benefits that increased profits by around GBP 58 million. We generated unusually high performance fees of GBP 78 million in 2017, which was significantly above our long-term experience of around GBP 40 million. We also had a one-off accounting benefit that led us to reduce our comp ratio by about one percentage point, or GBP 20 million in 2017. About half of that benefit unwound this year. In this context, we are pleased with the underlying performance, which is very similar to last year, despite a much more challenging environment. The second area of focus is our exceptional items. As you know, these are normally acquisition-related, including amortization of intangible assets. This year, following the operational changes we have made and are making, they include GBP 56 million of expenses from a significant cost reduction program. This is an unusual step for us, but we believe it is important to realize efficiencies from investments we are making, particularly in technology. We are continuing to reshape our business model, align to our growth ambitions, and to address the industry headwinds. The program enables us to manage our total cost ratio and still reward our people appropriately. The goal is to ensure we are able to attract and retain the best talent over the long term. Given the one-off nature of such a program, and because it does not reflect the ongoing cost of the business, we have disclosed it separately in our results. We expect exceptional items to return to more normal levels in 2019 of around GBP 40 million, which are mainly historic acquisition-related costs. Overall, and particularly given the market backdrop, we see this as a good set of results with the delivery of some important milestones. Now, let me go through some of the key other points, starting with net income. Net operating revenues increased by GBP 61 million, driven by 6% increase in average AUM. As you know, the movement is normally driven by four things: investment returns, FX, net new business, and acquisitions. Markets were relatively weak in 2018, with most ending the year below where they started. However, across the year, markets increased our average AUM by GBP 23 billion relative to 2017. That resulted in a GBP 28 million increase in revenues. But FX has been a negative for us this year. On average, sterling was stronger in 2018 compared to 2017. As a result, FX fully offset the benefit of stronger markets. What this picture tells you is that the main driver of revenue growth was net new business and acquisitions. Given our outflows this year, the growth in revenue from flows might be surprising. Let's spend a few moments looking at how flows have impacted our results. Total net operating revenue for the group grew by GBP 61 million, and as I showed you, GBP 41 million of that was due to flows. You will remember that annualized revenue is an important measure for us. It shows the impact we can expect on revenue from each flow over 12 months. To fully understand the impact, you need to look at a picture over a two-year period. The chart shows you that we had a strong tailwind going into 2018. That came from annualized revenues on 2017 flows, which generated GBP 39 million of additional income in 2018. On top of that, we started the year well, and flows continued to increase in the first quarter, pushing up the cumulative annualized revenues still further. That trend stopped in Q2, as market uncertainty, combined with some clients restructuring their investment strategies, led to outflows. These outflows pulled down cumulative annualized revenues over the remainder of the year. Nevertheless, 2018 net flows still added GBP 2 million to our revenues, resulting in total contribution from flows of GBP 41 million. In 2019, we will see a revenue decline of GBP 35 million from the 2018 outflows. If we look across the two years, the picture is still one of revenue growth, with GBP 30 million of additional revenues on the back of no net new business. That's because on average, we have lost lower margin business but gained it via strategies at higher rates, such as private assets. It is part of the reason our net operating revenue margins have held up at 47 basis points, even though the external fee pressures are still real. The other significant factor is acquisitions, as we increased our private asset capabilities. Let's look at the net operating revenue progression at a channel level, starting with wealth management. As you know, wealth management is one of our strategic priorities. The growth we have seen here is again good, with net operating revenues up 6% to GBP 282 million. That was driven mainly by a GBP 12 million increase in management fees. A small increase came from net banking interest, which more than offset the slight reduction in transaction fees. Net operating revenues from Benchmark Capital increased by GBP 3 million to GBP 13 million. That's in addition to other revenues of GBP 8 million on assets under administration. Let's focus on the chart on the right. This shows sustained growth with GBP 13 million of annualized revenues generated on net inflows of GBP 4 billion across the two years. Importantly, and in contrast with the rest of the group, we have a tailwind from flows in 2018, which will add to our revenues in 2019. We will also see significant growth opportunities through Schroders Personal Wealth, our new JV with Lloyds, which Peter has just talked about. Revenue margins excluding performance fees were 61 basis points, which is in line with 2017. For your models, we expect margins to be around the same level in 2019. As usual, business mix, the level of transaction fees, and interest income will have an effect. Moving to intermediary. Net operating revenues increased GBP 8 million to GBP 938 million in 2018. Excluding performance fees, the increase was GBP 27 million. That increase was driven by net new business and higher average AUM. The net inflows we generated in 2017 of GBP 3.4 billion drove annualized revenues of around GBP 44 million. GBP 25 million of that is included in these results. However, the benefit has been partly offset by revenues lost as a result of the GBP 4.6 billion of outflows. Those outflows equate to a reduction in annualized revenue of GBP 32 million, of which GBP 2 million is included in these results. What is important is that despite there being net outflows across the two years, we have still grown our revenues by GBP 12 million. Revenue margins were unchanged at 72 basis points. Despite margins holding up this year, we do still see longer-term pricing pressure. This may mean our margins fall a little in 2019 by perhaps a bit. But as you know, this will depend on how business mix changes. Moving to institutional. Net operating revenues were up GBP 37 million to GBP 851 million. The increase was driven by higher average AUM, which was up GBP 15 billion. This time last year, I highlighted the demand we had seen from institutional clients for lower margin fixed income and multi-asset products. As expected, this trend continued in 2018, but offsetting this, we are now seeing the benefit of the investments we have made to develop our private asset capabilities. There is demand for this asset class as institutions look for increased long-term returns. For us, it represents higher margin business, and importantly, a long-term partnership with the client. As Peter has highlighted, we generated GBP 2 billion of net inflows in private assets in 2018. That is in addition to the assets we gained through the acquisition of Algonquin. Together, they bring our total private assets AUM in this channel to GBP 28 billion. Including other flows, we had total net outflows of GBP 6.6 billion in the institutional channel. That equates to a reduction of around GBP 7 million in annualized revenues, but that has had no impact on these results. The chart on the right is the same story as for the group and intermediary. A tailwind into 2018 from flows, and a headwind into 2019. But overall, annualized revenues are up GBP 5 million on the back of GBP 2 billion of outflows across the two years. Net operating revenue margins, excluding performance fees and carried interest, was basically unchanged at 31 basis points. That is in line with the guidance I gave you and reflects the benefit of the growth in private assets that I have just talked about. In 2019, margins may come off a little, but we do not expect this to be significant with some further benefit from our growth in private assets. Now let us turn back to the overall income bridge. You can clearly see the benefit of the acquisitions we have made, which have added GBP 72 million of net operating revenues in 2018. These were mainly in the institutional channel that I have just been talking about. The revenues include the impact of the acquisitions this year, most notably Algonquin, together with the full year effect of the acquisitions completed in 2017, including Adveq, which introduced carried interest to the group. In 2018, we earned GBP 28 million of net carried interest, which helped offset some of the reduction from the unusually high performance fees we had in 2017. I touched on carried interest at the half year, and given it is new for you, I want to take you through this in a bit more detail. As you know, carried interest is similar to performance fees we earn on our core asset management business, but it is received over a longer timeframe. In cash terms, carried interest is received after distributions are made to investors to the fund, and they have received a minimum preferred return. There is a catch-up phase where we receive 100% of the return up to an agreed share of profits. For us, this is typically 90/10 in favor of investors. After this, we share another further returns in the same split. We also have commitments to pay away carry, which is a percentage of the carry we receive. We have 74 investment vehicles that entitle us to some form of carried interest. Although the rights can vary significantly from vehicle to vehicle. They represent around GBP 8 billion of our AUM. The vehicles are normally liquidated after a period of around 15 years. For us, the earnings potential is significant, but in cash terms, it will be received over a long timeframe. The chart on the screen shows in simple terms how the returns are attributed. Now we have to deal with accounting for both the income and the payaway. I would love to recognize this on a cash basis, but I am not allowed to under the accounting rules. To make matters worse, we are required to have a different basis for recognizing the income and the payaway, even though the payaway is a proportion of the income we receive. Under accounting rules, we have to recognize the cost earlier than the corresponding income. I realize this is complex, but it is helpful background to understand the challenges in forecasting any net income from this source over the short term. In 2018, we have earned GBP 56 million of gross revenue that came from nine funds, and these were generally well-advanced in their life. We believe this revenue is prudent, but it still may be impacted by market movements until it is realized. We have also recognized GBP 27 million of costs in relation to the payaways. Importantly, although carry is a new category of net revenue for us, and we expect it to be an increasing part of the financial results over the long term, for now, it represents only about 1% of net operating revenues, and I do not think you need to focus on it too much in your models. Turning again to the overall income bridge, acquisitions contributed GBP 72 million to the growth of which GBP 28 million was carry. I also mentioned that performance fees were unusually high in 2017, and these reduced by GBP 52 million in 2018. Going forwards, it makes sense to look at carry and performance fees together. These two revenue sources contributed net operating revenues of GBP 55 million in 2018. At this early stage, we think that about GBP 50 million per annum for both net carried interest and performance fees is reasonable over the medium term. That is up GBP 10 million from the GBP 40 million I usually guide to. Lastly, other income decreased by GBP 6 million. This includes revenues from our assets under administration, as well as the returns on our investment capital portfolio, FX, and other gains. The small reduction is mainly due to lower investment returns as a result of the market falls we saw in the second half of the year. Putting it all together, net income was up 3% to a little over GBP 2.1 billion. That is it on revenue. Let us now look at what is happening to our operating costs. Comp costs continue to be the biggest component of our cost base as they make up 66% of our total costs. As I have already mentioned, we have seen the one-off accounting benefit from comp deferrals reduce by about half this year. My guidance was for this to increase our comp ratio to 43.5%. However, we have maintained our ratio at 43%. This reflects continued cost discipline. Looking forward, we expect the remainder of the accounting benefit to fully unwind next year. You might expect this to translate into a higher comp ratio of 43.5% in 2019. As a consequence of our focus on managing our costs, we are targeting a 43% ratio. As you have heard from me before, our focus is on delivering long-term growth. In challenging markets, it is even more important to do the right thing and invest in our strategic growth areas. In 2018, we have seen some important changes being realized, and we have made further investments for the future. These include our new headquarters, our front office investment platform, and the acquisitions we have made to expand our private asset capabilities. As a result, our non-comp costs were GBP 459 million. That is slightly higher than the GBP 455 million I guided to, but it is simply due to acquisitions and effects. It means a total cost ratio of 64%, which continues to be better than our long-term target. Both Peter and I have talked about the importance of the investments we are making in driving the long-term growth of Schroders. We remain focused on our strategy and are continuing to invest for the future. As a result, we expect to see some increases in our non-comp costs this year. There are three key areas driving this. The first of which is technology. We are investing to deliver, firstly, process efficiencies. Secondly, to improve our client experience. Finally, to deliver data insights for alpha generation. The second key area of non-comp costs is accommodation. Despite the potential for greater automation, we are fundamentally a people business, and it is our talented workforce that ultimately supports our growth. As we expand, we need more space, and we have therefore been making investments in our property estate. In 2019, it is also important to understand the impact of IFRS 16. This requires us to recognize greater lease costs at the start, before these reduce over time. It accounts for about half the increase in our 2019 accommodation costs. To many, well certainly to me, this is a strange outcome as it does not match costs to the benefits received. It also moves us further away from cash view. The third and final key area of non-comp costs is the full year impact of the acquisitions we have made. Together, the changes mean our non-comp costs may increase to around GBP 490 million in 2019. Looking further ahead, and as I mentioned earlier, we have also been making some structural changes, particularly in Luxembourg. These are an important part of the developments we are making to our operating model. As a result, in time, we may see a shift between comp and non-comp costs. However, we do not expect this to have much impact in 2020. Before 2020, sorry, that was silly. As always, our focus remains on managing our total costs. Now, let's turn to the last section on capital. We continue to maintain a strong capital position with total capital of GBP 3.6 billion. That is up GBP 150 million from last year. As you would expect, our regulatory capital requirement has increased as we have grown. But it is also impacted by a number of other changes. We have a GBP 50 million increase following the final transitional change to the capital conservation buffer. In addition, we have a further GBP 55 million increase as a result of the Bank of England's decision to significantly increase the countercyclical buffer on U.K. exposures. On top of which, IFRS 16 has had a further impact, resulting in a GBP 55 million increase in our requirement. I paused there, IFRS 16. Anyway, I do not know what to say in terms of a notional increase in our balance sheet, further increases our capital charge by GBP 55 million. I am sure it makes sense to someone. After allowing for the final dividend, our capital surplus is GBP 1.2 billion. As you know, we have been focused on making our capital work harder to support our future growth. In 2018, we have continued to invest in the development of new products and in co-investments to support our private assets business. As a result, our seed and co-investment capital has increased to GBP 535 million. Despite this increase, we continue to maintain significant liquidity as part of our working capital and through our liquid investments. You can see that both our capital surplus and our liquidity are managed carefully, and that we are deploying this effectively to support our growth agenda. Overall, we continue to maintain a strong position. In summary, it has been an important year as we delivered on a number of strategic priorities. Net income increased by 3%, and our total cost ratio returned to a more normal level of 64%. That resulted in profit before tax and exceptional items of GBP 761 million, which equates to a 5% decrease in basic EPS before exceptional items to 215.8 pence. Despite this reduction, we have maintained our final dividend at 79 pence. It means a full year dividend of 114 pence, which is one pence higher than 2017 and represents a payout ratio of 53%. I now hand you back to Peter. Thank you, Richard. Right. Got the clicker. You got all that. There are no numbers on the next chart, so you will be pleased to know. What I want to do is, we have talked a lot about how we are reshaping the group and how the investment that we are making in being a different business for the future, given the trends in the industry. I want to just try and take you back to the growth drivers that we have talked about in the past and what that means from a structural change to the business. Because there are a lot of initiatives being talked about, and let us just try and put them in some sort of context. We have talked in the past of these seven drivers of growth, and for those of you who remember our investor day, we went through a number of these. We are having another investor day on the 15th of May to unpack some more. Hopefully you have got that in your diaries. Those seven drivers of growth, we have had a whole series of initiatives against each of these, and those are important. I will come back to those in just a moment. Fundamentally, what are we trying to do with the business? That really splits into three distinct and clear areas. The first is we want to find a growth strategy for the core business. It is still the largest part of our business, it is absolutely critical. Within that, we are targeting client longevity and sticky assets and being able to retain assets for long periods of time is the significant difference between an asset management business and the growth of some of the private markets businesses or some of the advisory business that we are seeing, is that volatility of assets. We are trying to slow that down. Whether it is being complex insurance mandates or different types of relationships with clients, that is mission critical in that core area. The second area where we talked about it is getting closer to consumer. We have had a number of initiatives there. Go back in time, we acquired the Halls business, in asset management. Most recently, you will see we acquired a business in Singapore, Thirdrock, and the Lloyds joint venture, and I will come back to that in just a moment. Finally, growth of private assets business. What we are seeing is, and this is not news to any of you as analysts, the number of public companies continues to shrink. Public markets in the West are becoming less attractive places for capital. Our clients are moving more money into private markets, and private markets are increasingly becoming accessible to mass markets. We want to ensure that we have got a strong capability in private markets that has the added advantage of having more sticky money, and more capacity for higher revenue products. Those three elements are critical. Clearly to do that, you need to have a strong underpinning of technology. We would not be able to be making the progress in solutions and complex mandates without the strong technology underpinning. How do those various, and I hope the technology works here, those various initiatives that we have taken across those seven move into the three pillars that we are talking about? First of all, the core business. This year, the key achievement there was the acquisition of the Scottish Widows mandate. We have also seen very significant growth in our solutions business. It is a key area of that, and we are seeing very good momentum across a range of jurisdictions. We have launched our Helix Fund, which is now out there, which is a multi-strategy fund, a very different proposition in the core marketplace. Clearly we have seeded a significant number of new strategies, particularly multi-asset strategies, around the world. That enables growth to follow on in different markets. That is not to say we are putting the white flag up on the rest. Absolutely not. We still see significant growth, but new growth drivers in that core business is important. On the consumer side, we have talked in the past about the relationship with Hartford in the U.S., which has transformed the profile of our U.S. business. We bought Benchmark Capital two years ago, which has helped our presence in the U.K. And Thirdrock now will develop our presence in Singapore very significantly as a strong growth advisor business there. I will just spend a moment talking about the Lloyds joint venture. This is obviously different from and separate to the SWIP mandate. Here what we are trying to do is to take what the best of the banking business. So you have very large market share in Lloyds across mortgages, high affluent people, so 20% to 30%, depending on how you measure it in the U.K., the number one digital bank in the U.K. Marry that with an investment brand, which resonates well with advisors and resonates well with end customers. End customers, when we have tested it, would prefer to buy from an investment brand rather than a banking brand. Within the Lloyds network, there is clearly a very significant number of referrals, and that is, to my mind, the rocket fuel of advisors. That is what they need is referrals, and that is a huge We see it as a potential to mine it a lot further. So the combination of being able to take in a large advisor force, but most importantly, transform the referrals which exist within that network, we think gives us the potential for a new growth business between the two of us. We will brand it Schroders Personal Wealth. It is in the process of being established at the moment. The management team has been appointed, the offices are being drawn together, the regulatory applications are in. But the reality of the timeline of these things is we will not have regulatory approval, we think, until the third quarter before we can launch. But there is a lot of moving parts. Looking forward on a three-year view, I think it is an interesting business. I would not want you foaming at the mouth about it for next year because there is a lot to do. But fundamentally, we see the wealth business and the proximity to the consumer as a growth business. As Richard showed in his charts, the persistency of that growth is very clear from the numbers. Then on the private asset side, we have talked about this in the past. We made further progress this year buying a business called Algonquin, but more importantly, embedding the private assets capabilities we have got into different markets. We have hired a new alternative sales team. That has worked well, is now starting to gain traction. We have acquired a small debt origination business in the U.S., A10, which will drive our securitized credit team. So we have made four or five primarily organic or small acquisitions in this area. But what we are starting to see is good momentum. I think the challenge here is that we are late cycle. We expect debt markets, you see a lot of very low covenant issues being made. We expect the amount of distress in that market to pick up. It is not a time when you would logically go out and acquire businesses on fancy multiples. A couple of businesses have traded at very high prices. That's not a business that we want to be in. We've been able to buy the business we bought at very sensible prices. Clearly, we need to do all that with an underpinning of technology. Richard said that's technology for investors, technology for clients, and robotics, et cetera, for a strong operational platform. It nearly worked. You can see that the three pillars are absolutely critical to how we can reshape the growth. I think if we've got one mantra that we're very clear about is that we are investing for growth. There are different strategies emerging in our industry, but ours are very clearly around we see this as a growth industry. We see there are still significant opportunities, and we want to invest behind those. That is now it. Thank you. If I throw the floor open for questions and answers, Richard and I will endeavor to answer them all. If I could just ask one thing, that you give your name. Sorry. Outlook statement. It doesn't say a great deal, but we've got to cover it. It's not news to this room that there are challenging market conditions. We do see there are opportunities for growth. We've talked about the strong pipeline for new business. Our focus is on delivering that effectively and on finding those new markets. Richard said, there are headwinds entering into 2019 based on the profile of last year's new business wins. Yet we do see a good pipeline of new business on the other side. Right. We'll now do Q&A, and if you could give your name and number, then that would be most grateful. First one to get a microphone. Thank you. It's Chris Turner from Berenberg. Two questions, if I may. Firstly, on the regulatory capital, that increased about 20% year-on-year. You highlighted about GBP 100 million of that was from capital conservation buffers, countercyclical buffers, which I'm guessing relate to the banking license in wealth management. Is there anything you can do there going forward to optimize that? Maybe consider dropping the banking license, maybe part of the Lloyds joint venture? Secondly, your working capital also increased by about GBP 400 million, about 27% year-on-year. Can you just discuss the drivers of that? I think I said I had two questions, I've actually got a third thrown out there as well. Peter, you spoke about client longevity. Obviously, 2018 was a bit tricky. Your gross redemptions actually picked up year-on-year. What is it that gives you confidence? Is it the mix? Is it the client mix, the product mix that gives you confidence that longevity will continue to increase? Thank you. Okay. Thanks, Chris. First of all, on the banking license. Banking is an important part of our proposition to the wealth clients we have in the U.K. It is not an easy decision to say we should give up our banking license. At a time when we have got surplus capital, if some of it is allocated to countercyclical buffers, so be it. It is not capital that is burning a hole in our pocket. As I have said, we are at that stage of the cycle where we are somewhat skeptical about valuations, et cetera. It is not as if we would be looking to redeploy that elsewhere. Clearly, the size of those buffers are large given the size of our U.K. loan book, which is very small indeed. Do you want to talk about working capital? In working capital, there is not a lot to say, Chris. Obviously, we are getting bigger. Some of it is just timing differences in that we have not extracted profits from some of the overseas subsidiaries. There is not a lot to look into there. It is just going up generally because we are getting bigger. Client longevity is a really important metric for us and for all our distribution teams. What we have seen is that, two things. From an institutional perspective, the mix of assets that we are taking on, the more complicated mandates, you would expect those to have good longevity. The more strategic partnerships one develops, the better the longevity is around those. In the intermediary markets, we are very much more at the whim of risk on, risk off. That is far shorter, and that is where we saw some of the, obviously, if you have a one-off big outflow, that impacts your client longevity. In Japan, we had that this year. I think the actions we are taking, to my mind, feel as if the trends are in good shape. Clearly, the more one does in private assets, if you do the maths on just having 20% of your business in private assets, that would effectively add 2% or 3% to your underlying growth rate, just from the longevity mix. Good morning. It's Hubert Lam from Bank of America. Hopefully, I go. Three questions. Firstly, on SWIP, if you can give us an update as to when you should expect the SWIP assets to come on board. Any update on the arbitration case that's currently ongoing on that? Second question is on the Australian super funds. I continue to see outflows coming from that as they internalize their asset management. What's your exposure left on the Australian super funds? Is this something that we should expect more to come through for you going forward, or is the risk just now minimized? Third question is on the dividend. You've increased your dividend this year by P, although your earnings EPS has gone down. So your payout ratio's gone up to 53%. Historically, I think you've guided towards 50. Is this a step change now in your payout ratio? Okay. I'll do the first two. I'll give Richard the third one. SWIP, obviously it's not our arbitration, it's a third party's arbitration, and confidentiality keeps that at arm's length. My understanding is it's being heard in March. Assuming there's a positive outcome, which I think is our hope and expectation, then we will push the button in terms of implementation for a good chunk of the assets coming over this year, and the details of that are all being worked through at the moment. But that arbitration is ongoing and will follow its own course. The Australian super funds, I think, is a good question because it's been a theme of the last three years as we've seen that restructuring. I think the big super fund changes are largely behind us now. There is also the Australian equivalent of RDR going on in the background and the major review of bank behaviors, which has gone on and been so much in the headlines. But those are much less important for the dynamics of our business. So I would like to think that the biggest changes are behind us there. Richard, do you want to comment on that? On dividend, no. Our policy is a progressive dividend, so we wouldn't anticipate it declining year on year. Clearly, profits are lower this year, so it's 53% payout ratio. But we still, in the long term, would see a 50% payout ratio, but that's subject to profit growth. If profits decline, clearly, the payout ratio is going to tick up if we don't reduce the dividend. I think it's fair to say that our balance sheet is still relatively strong, and hopefully, there wouldn't be a significant likelihood of a dividend reduction. We're not saying it's impossible, but it's quite unlikely. Hi, it's Hayley Tan from Citi. Oh, sorry. Thank you. Just three quick questions from me, please. Firstly, just to follow up on Hubert Lam's question, could you give us a number for the remaining Australian superannuation AUM, if possible? Secondly, just on these structural changes to the group, can we confirm that the benefit to cost is really just the comp ratio at 43% this year rather than anything beyond that? The third thing, the question on flows as well, if I can. The Hartford success has been really impressive the last couple of years. I guess we could now start to be concerned that those funds have been around for a bit longer, so there might be a natural level of redemption. Is there anything you can guide us on in terms of how some of Hartford's other relationships, how sticky they've been historically? That'd be great. Thank you. No problem. Our total institutional exposure, both super funds and other institutional exposure in Australia, is GBP 14.9 billion. That's a pretty well-diversified exposure. The lumpy ones have now gone. If Richard could take the question on comp, I'll just quickly cover off The Hartford. I think that there we actually still probably a year away from the maturity of that book, a year and a half away from the maturity of that book. What we're putting in a series of new products, whether it be more interval funds, securitized credit, et cetera. So it's got a growth dynamic to it, and we would expect to see growth flow significantly greater than net on into the future for some while. That book is quite a sticky book based on the experience that one of the manager has had with them. We feel good about the difference between gross and net. In terms of restructuring, Hayley, you are right. Naturally, the 43 would have 50 up to 43 and a half this year, all things being equal, because of the unwind of that accounting benefit we had last year. We are looking to hold comp cost at 43%. That is a lasting benefit. What it also means is we can pay our people appropriately to retain our best talent, and that is really important in a talent business as well. That does have significant benefits in terms of delivering our growth strategies. Hi, good morning. It is Gurjit Kambo, JP Morgan. Just three questions. Firstly, in terms of the there is a lot of businesses that you have been entering, lots of new strategies that you have been entering. Are there any areas where you have actually been exiting or streamlining the business? That is the first question. Secondly, in terms of the mandates, large mandates that you have lost, is there any sort of theme why you have lost those mandates? Is it performance, insourcing, fee structure? Finally, just in terms of the Schroders Personal Wealth, the costs to set that up, are they included in the guidance that you have given? On business we have exited, the two that stand out is a streamlining of our wealth business. We have exited a small business that we had in Italy, and we have exited a business in Eastern Europe. We just took the view that simplifying our business in those areas where we did not see growth was the right thing to do. I think one has got to be quite clear which battles you are going to pick, and private assets is a clearly battle. Wealth in the U.K. is a strength. Wealth for us in Asia, given the strength of the Schroders brand, was a clear strength. But fighting the battle in Italy and Eastern Europe did not feel like the right thing to do. Shape on redemptions. I think there are two big ones that I would look at this year. Probably three. One is the change of the U.K. local authorities. You remember that U.K. local authorities went from 84 or so to a pooled eight super funds. The manager selection process for that is going on. We saw GBP 5 billion out of our U.K. equity business. Part of that was around the restructuring of local authorities. The second big outflow was the one in Japan. That was a Japanese buy-and-maintain bond mandate whereby we consolidated managers down to one at a very low fee level, and we wouldn't have participated at that low fee level. It clears the price that it's You got to be clear about what business you're in, and that wasn't one for us. The third was a piece of business in Mexico, and that was as a direct result of BlackRock buying the business and saying, "We'll run the money ourselves." You will have these things, but I think actually, I would like to draw a contrast between the fundamental growth we've got going in some of these things and then the one-offs that you're going to get along the way, which are unfortunate but sort of inevitable. Should I do the last question? Oh, sorry. In terms of costs? All costs that I am aware of, and I have got pretty good visibility of costs, are included in my guidance. You need to just think about Schroders Personal Wealth there. It is a JV so we are going to be equity accounting there. So it is share profits that comes through this year. That share profits won't be significant in that it doesn't yet exist. So it will be later this year when we start seeing that benefit. Importantly, it also includes all the costs in relation to the take-on of the SWIP mandate. So that is fully included in my guidance. Clearly, I know what we need to do to get ready for take-on. I don't have clarity in terms of when the assets arrive. In terms of costs, everything is included in that number. So it should only change for acquisitions and FX. Yeah. Which is, I have been pretty accurate so far. This year and last year, my guidance, other than FX, which I can't control. I wish I could. It would make my life a lot easier. Acquisitions, I guess we do have some control, but I don't have a crystal ball exactly when they are going to appear. You shouldn't be surprised by non-comp costs. Yeah, good morning. It is Arnaud Giblat from Exane. Two quick questions, please. Firstly on MiFID. I was wondering if you had seen any impact from the ban on retrocessions in Europe from independent channels, given that you seem to have had outflows from Switzerland and Italy. My second question is around the JV, Schroders Personal Wealth. I am wondering if you could give us a bit more on the business model. What sort of fees are being charged? How, in terms of advice, in terms of platform, in terms of asset management? Is it going to be a restricted model or are you going to use independent financial advisors? You are talking about becoming a top three player in the medium term. How are you thinking about recruiting? Because I think the number of financial advisors that are out there are shrinking rather than growing. Thank you. Yeah. You are obviously right. There are changes going on in Europe. I think that they are much more marginal in terms of the extent to which they relate to MiFID. I would actually say that the biggest, by far, driver of the outflows we saw in Italy and Switzerland are simply a result of risk of appetite. You can see what type of funds they were coming out of and the timing of those flows. You saw the fourth quarter impact. That wasn't a restructure. I think we have to be mindful that those markets are changing and we are working with a slightly different group of distributors in different ways, and that is right, and we will continue to evolve. I think we feel pretty positive about being in a good position through those changes. Second issue about advice. The business model for that is going to be a restricted network. It won't be an independent network. The investment proposition is being worked up and clearly, we will launch that when it's ready. It will be a restricted network. I think it's important, this point on advisors. The U.K. market suffers a massive advice gap. A huge amount. We are not looking to go and try and hire lots of other advisors and rob Peter to pay Paul. This is a growth market where there's a vast number of people under-advised, and technology is underutilized. The issue for us is how do we train and build advisor network, restricted advisor network, with a really world-class investment proposition to grow that over time? Focusing initially on the referrals that come out of Lloyds, but then more broadly. I know there's been a lot of speculation about poaching and other things. For me, this is about how you grow organically a new advisor network. Because the opportunity, the average age of advisors in the U.K. is something like 56. The opportunity for this is to get the next generation right. It's take the 20 year view of it, not take the 2 or 3 year view. That's the proposition that we want to build. Morning. It's Anil Sharma from Morgan Stanley. Just 2 questions, please. If I look at the intermediary business, particularly over the last 18 months, if you take out the flows from Hartford, the growth there has actually been pretty tough. That's despite a pretty strong market backdrop. Just trying to understand what the drivers might be behind some of the underperformance there, and if you see a reversal in some of the growth. Secondly, on costs. Richard, please correct me if I'm wrong, but I think you said there was GBP 56 million of exceptional costs related to the cost saving plan. Just trying to understand what cost synergies do you expect from that plan? Once the transition to Aladdin is complete, which I think is also due this year, what extra cost savings should we expect? Are they going to and I'm assuming they're 2020 cost savings. Just quickly on The Hartford, first of all. Actually, it's easy to get. Unfortunately, some of the wins we get from The Hartford are institutional. So when I give you The Hartford number, I give you the aggregate Hartford number, but that is a mix of intermediary and institutional. Sorry about that. That will probably confuse your model. Before you asked me the question last year, how much was institutional, intermediary, I haven't got off the top of my head. It is something of the order of, I think 600 million of it was counted under intermediary, something like that. Then I think intermediary, if I was to say we've performed credibly, but the one area that I feel we've under-batted has been on European multi-asset. As we've been short a low vol product at a time when that's been the best-selling category in Europe. Part of the seed capital has gone into developing those products, but the reality was we didn't have the right product on the shelf as the market moved into that segment. So that, if you like, has been not playing in the high-growth segment within Europe, has probably been the challenge and having rather more market share in equities than multi-asset. We fully participate, I think, in credit, and done a very good job there, but that was the headwind. We've lost a bit of. I think in Asia, there's become a lot more competition come into the income space. So we were very early innovators in multi-asset income, and that's now a much more competitive marketplace. So that is. That's a relatively small point. Those are two questions. Selling costs. Selling costs. On the GBP 56 million, that's all about the comp ratio, and we're at 43% this year. I think we should go back to last year, we were at 43%, and I think I've set out that should have moved to 44. 43 was artificial. So by taking that restructuring cost, we are essentially trying to deliver an ongoing ratio of 43%. So a whole 1% increase, not the half, because it should have moved to 44, and we've done some of that this year. In terms of Aladdin and other efficiencies that we should be deriving from that, we've got a lot of decommissioning to do, and this year is a hard year in that there's a lot of work to be done to turn off a lot of other applications and to really get the real benefit of a simplified business process. This year, there isn't much. Actually, there's more incremental costs because it costs money to turn things off. 2020 is the year that I'm looking forward to because we will get to have more simplified, globally consistent business processes. This year was always going to be painful, and you probably, in meetings we've had, have picked that up. I haven't been promising very much in respect of 2019, but it's all in the cost guidance I've given you. I've been fairly transparent what I think our costs are going to be. Thanks. Michael Werner from UBS. Two questions, please. I saw in the press release this morning that your management fees in North America were up 10% year-on-year. I know that's a key area of growth for you guys, but I was just wondering if you had an idea of what portion of that was organic versus inorganic through acquisitions. Then second, also saw a sharp decline in terms of the one-year performance for the company, down to about, I think, 43%, if memory is correct. I was just wondering, is that something that we saw throughout the year, or is that something that was more specific to Q4? If you could just provide a little bit more color there. Yeah, sure. North America, easy one. It's 100% organic. When I talked about flows, one of the characteristics of North America was we were taking in a lot of more equity mandates, particularly emerging markets. That was the major reason for that increase. I wish I could say it was because we're putting up prices, but it wouldn't be true. One-year performance numbers were based around two areas, fixed income, multi-asset. Multi-asset was impact of markets, particularly in the fourth quarter. Fixed income was, again, a fourth quarter phenomenon. If you remember that last week of December, we saw a very significant and rather odd shape of markets, and we've had a good bounce back for the first two months of the year across both fixed income and multi-asset. One-year numbers are not the basis on which clients make decision. But if you look at the three-year numbers, if I was to make a bet of which way the numbers are going to go at the next reporting point, I think if anything, they're going to move up rather than down because of the short-term noise which is moving out from three years ago. In terms of performance, we're pretty comfortable about where that sits. Are we there? No more? Thank you all very much. I look forward to seeing those of you who want to come along at the 15th of May investor day. Thank you for joining us.