Earnings Call: H2 2013

Mar 6, 2014

Okay. Well, good morning everybody, and welcome. We announced, as you saw this morning, record results for 2013. Net revenue was up 24% to just over GBP 1.4 billion. Profit before tax and exceptional items was up 41% to GBP 507.8 million. The board is recommending a 40% increase in the final dividend to 42 pence per share, taking the dividend for the full year to 58 pence per share, an increase of 35%. We generated net new business across the group as a whole of GBP 7.9 billion in 2013. We completed two strategically important acquisitions in STW and Cazenove Capital Management. Our assets under management ended the year up 24% to a new high of GBP 262.9 billion. Looking at the asset management business to start with, a strong level of new business. We had a gross new business of just over GBP 70 billion in 2013, which was close to the all-time record back in 2010, which was about GBP 75 billion. So well up on the previous year to GBP 70.3 billion. Within our intermediary retail business, we had the highest ever level of gross sales. Net inflows, I think, were a good, pretty competitive GBP 9.4 billion in asset management. Revenue margin stable at 53 basis points, excluding performance fees. Well diversified by channel and region. In terms of channels, the split was almost exactly 50/50 between net inflows in institutional and net inflows in our intermediary retail business. In terms of region, a very strong first half in Asia. A very strong second half in the U.K. A strong first quarter and strong fourth quarter in Continental Europe. I think most importantly, every region, Asia, the U.K., Continental Europe, and the Americas, was positive in terms of net inflows in 2013. We operate, as you know, in many countries around the world. Every single business we have is profitable apart from one. I think we're in something like 27 countries, so 26 out of 27 are profitable. It's quite a diverse range of earnings. Coming after the U.K., which is obviously our largest business, we have about five equally sized businesses making a broadly equal contribution to profit in Hong Kong, Australia, Switzerland, Italy, and the United States. Looking at the institutional business, net inflows of GBP 4.6 billion. I think a good year. Solid. Not an outstanding year. I think we saw fewer opportunities, particularly amongst official institutions. We had a number of clients moving money away from us for asset allocation reasons. Nevertheless, I think GBP 4.6 billion of net inflows is a pretty solid result. We had positive inflows in every asset class in multi-asset, leading the way with GBP 2.9 billion in equities, at GBP 1 billion net in fixed income and in alternatives. The big negative in the second quarter we discussed at the interim stage in fixed income was due to two things. First of all, a very large U.S. client who parked a very significant fixed income portfolio with us on a temporary basis, reallocating part of that to other managers, which we knew was going to happen and happened in the second quarter. Secondly, we had some outflows from STW shortly after that acquisition closed. 70% of institutional funds are outperforming over one year, and we generated GBP 35 million of performance fees in our institutional business in 2013. Looking at intermediary. A very strong year, I think, in intermediary, GBP 4.8 billion of net inflows, up from GBP 3.3 billion in 2012. Net inflows in every region and concentrated in multi-asset and equities. As you know, outflows in U.K. large cap in the second quarter, but we've recovered obviously very well from that in the second half. We had a number of new product launches which have been quite significant for us this year. Our Global Multi-Asset Income Fund, particularly in Asia, which was an innovative new product launch and very successful in the first half of the year. A number of other product launches, including some on our GAIA platform, where we have a UCITS capability for hedge fund-type structures, too. In particular, I'd mention one is our Insurance Linked Securities business, which has been very successful. Secondly, a long-short equity product where we've raised well over GBP 1 billion in the last seven or eight months. 70% of our intermediary funds are also outperforming over one year, and we booked performance fees in our intermediary business of GBP 45 million. Looking at some of the individual asset classes. A good year in equities. Net inflow of GBP 2.8 billion. I've highlighted here the principal asset classes into which we saw net inflows last year. Asian equities, very strong at GBP 2.5 billion. We had GBP 700 million of net inflows into emerging markets. We had a very strong performance in Japanese equities. I think we were one of the strongest sellers of Japanese equities here in the U.K. Last year, we generated GBP 1 billion of net inflows in Japanese equities global and European equities, so well spread across the piece. 70% of our funds are outperforming over three years, so we have a competitive track record in our equity business. We have a highly diversified range of strategies. We've integrated the Cazenove equity team, so they're all now embedded here in this building with our equity colleagues, and we've made, and continue to make some, I would say, very selective additions to our talent pool on the equity side. We did that in 2013. We'll continue to do that very selectively in 2014. Multi-asset, now GBP 52 billion of assets under management. It's been, in volume terms, the fastest-growing part of our business for the last three or four years. We've generated GBP 21.3 billion of net inflows in multi-asset since 2010. We had another very good year in 2013, with GBP 6.9 billion of net inflows, of which GBP 2.9 billion was in institutional and GBP 4 billion of that was in our intermediary business. We have a competitive range of outcome-orientated solutions, and we're organized in this business across investment outcomes. Wealth preservation, aiming to generate a stable, diversified total return. Risk control growth, equity-like returns with lower volatility. Income, aimed particularly at the retail market. Inflation protection, which is a very big product for us, particularly in Australia. Risk mitigation, LDI and volatility-controlled equity strategies. We see growth opportunities in this business pretty much across the piece in terms of each of these solutions or products, and also in terms of geography and channel. We think this business can continue to grow at a good pace. Turning to fixed income, I think this is a turnaround story on the back of some important changes to the investment team, some changes to investment processes, and we think that this business is well-positioned now to grow. We've got very strong performance, and the trend is extremely good. 70% outperforming over three years, 78% outperforming over one year. We're seeing a number of consultant upgrades and new business opportunities in unconstrained bonds targeting typically returns over three years, absolute return, targeting positive returns on any 12-month rolling basis. Long duration U.S. bonds with STW and global and European credit. The STW acquisition, I would say, is well on track. We've seen some outflows from STW absolutely within our expectation, about GBP 450 million of lost clients and probably around GBP 350 million of clients who have reduced their commitment but remain clients of the firm. Performance is extremely good. They have a very good long-term track record, which has been maintained, and we think we're now very well positioned to grow that business. We acquired a 30% shareholding in an Insurance Linked Securities business in Zurich called Secquaero in about the middle of last year. Very small business. It had $250 million under management when we bought that stake. We now have $1.1 billion under management in Insurance Linked Securities, which we think is an interesting albeit niche growth area, and Schroders' distribution getting behind a very high-quality investment team, very high-quality product, has resulted in a quadrupling of that business in seven months. We established in December last year a capability in convertibles. Previously, we'd worked with a third-party manager where we had distributed convertible funds on their behalf. We've decided to terminate what was a very successful and friendly relationship and actually now do it ourselves, and we brought a convertible team in-house and we brought the sub-advised fund back in-house, and we're now running GBP 1.4 billion in convertible bonds. As I say, I think our fixed income business, which overall last year was marginally positive, I think it's well positioned to grow in the future. Turning to wealth management. This business, as a result of the Cazenove acquisition, is fundamentally repositioned now as part of Schroders, a much larger part of our total business, and in terms of its market presence, particularly here in the U.K. Net revenues were up 59% to GBP 150 million. That was GBP 53 million in the first half and then GBP 96.5 million in the second half with Cazenove's. Profit before tax and exceptional items was up 191% to GBP 34.3 million. GBP 10.5 million in the first half, GBP 23.7 million in the second half. We've had some exceptional items relating to Cazenove, as expected, integration costs and amortization of intangibles. Richard will talk more about that in a second. But we've also made a GBP 15 million provision for a Department of Justice program looking at potentially non-compliant U.S.-related accounts of Swiss banks. This was a program announced on, I think, August 29, 2013. Most if not all Swiss banks are participating. You may have seen Coutts made an announcement in relation to their Swiss banking business just a week or so ago as part of the RBS announcement. We are participating in that program. This doesn't only relate to U.S. clients, it also relates to clients with any kind of a U.S. connection, where there may have been, inadvertently or otherwise, some non-compliance with U.S. tax. This is our best estimate of the result. We don't expect a conclusion to this for probably 12-18 months. We're working through all the documentation. Most of these clients are no longer clients of the firm. We've taken this provision, as I imagine most Swiss banks have, against our 2013 results. Last year, we had net outflows in this business of GBP 1.5 billion. We highlighted this at the half year stage, and again, I think with the third quarter results, two very large, low-margin clients, for various reasons to do with generational change and so on, terminating their relationship with the firm. The underlying business, I think, is doing well. Indeed, we've seen positive net flows from the Cazenove side since the acquisition closed in July. My sense is the client reaction has been very positive and people see the logic of this transaction and a very similar culture. I think the underlying opportunities here are quite encouraging. In spite of these outflows, obviously assets under management are up very significantly to GBP 30.1 billion at the end of 2013, against GBP 16.5 billion at the end of 2012. We have significantly increased scale in the U.K. in terms of assets, in terms of clients, in terms of number of client-facing people, in terms of our market presence, all of which I think is very positive in what I think is a potentially big growth opportunity for us. We have a broader client offering, as we've discussed before, importantly with financial planning now as a central part of our offering for clients. We have new leadership here in the U.K. and in our Swiss business to take the private bank forward. I'm now going to hand over to Richard. Good morning. As you've already heard from Mike, we have delivered record results this year. Our numbers demonstrate the benefit of good investment performance, as well as the impact of higher equity markets. Our positive investment performance has also allowed us to generate higher performance fees. We've also benefited from the success of the acquisitions we completed earlier this year. In a minute, I'm going to take you through the usual financial summary, but I'd like to start with the financial highlights. Net revenues are up strongly by GBP 273 million. As you can see here, that's 24% up on last year. Higher markets and good investment performance for our clients mean that we are now seeing the benefit of the significant organic growth we have delivered in recent years. We've recorded over GBP 47 billion of net inflows since the start of 2010, and that excludes recent acquisitions. We've also earned significantly higher performance fees at some GBP 81 million, and I'll come back to that in a minute. The combination of the increase in AUM and higher performance fees has led to a significant increase in underlying PBT at GBP 508 million. That's GBP 148 million up on last year or some 41%. We have exceptional items of GBP 60 million. GBP 45 million is mainly due to the STW and Cazenove acquisitions. There's also a GBP 15 million provision for the U.S. Department of Justice program applied industry-wide in Switzerland. I'll return to both of these items later. I know you focus on underlying diluted EPS, which is up 43% to 144.6 pence. That's in line with our increase in PBT. With these strong results, and taking into account our financial strength and management's confidence in our long-term growth prospects, the board has recommended a 40% increase in the final dividend of 42 pence. The total for the year will be 58 pence, as you see here. This means the total dividend is up 35%. Our approach on the dividend is right in line with our stated policy for the long term to increase the dividend progressively in line with the trend in profitability. As always, we will set the interim dividend in 2014 in light of the actual results we produce later this year. As I said, net revenues are up strongly. I now spend a couple of minutes taking you through the detail. Here's where the GBP 273 million increase in net revenue came from. With a total of over GBP 1.4 billion, our organic growth strategy and positive net new business continued to deliver revenue growth. That accounts for GBP 56 million of the increase. The higher market levels and good investment returns I mentioned right at the start contribute some GBP 96 million. Our excellent investment performance has benefited performance fees, contributing GBP 81 million, up GBP 52 million over 2012. Equity mandate is dominated in the first half, especially Australian and Asian equities. In the second half of the year, we got strong contribution from the Cazenove funds and the Schroders European Special Situations fund. It is very difficult for us to predict, but we expect performance fees this year return to more normalized level of around GBP 50 million. Finally, our acquisitions of Cazenove and STW contributed GBP 80 million of additional revenue, excluding performance fees. That's GBP 110 million in total. Other revenue movements were broadly neutral, leaving us with total 2013 revenue of GBP 1.4 billion. Asset management generated almost 90% of our net revenues. Now I'd like to give you the split between our two sales channels, institutional and intermediary. Starting with institutional, revenues of GBP 557 million, up GBP 68 million on last year. Excluding the performance fees we earned, net revenue is up GBP 57 million. That's 12% on a year ago. Some GBP 26 million of this increase is due to positive net new business we brought in over the last two years. A further GBP 21 million is due to good investment returns offsetting a slight reduction in other revenues within institutional. During the year, STW has contributed GBP 10 million of revenue. Performance fees have increased by GBP 11 million to GBP 35 million. The institutional channel has produced good core business growth, and that's been one of our key objectives in recent years. Now turning to intermediary. Here, our net revenue is again way up on last year by GBP 164 million. Performance fees are a lot stronger this year at GBP 45 million. We've also generated relatively consistent net inflows, increasing our net revenue by some GBP 32 million. Market movements have also helped and increased revenues by another GBP 60 million. Finally, Cazenove's funds business, when you exclude performance fees, has added around GBP 30 million. Overall, asset management margins excluding performance fees are down slightly from 54 to 53 basis points. Within the split margin, institutional margins are 38 basis points. That's two basis points down on 2012. Half of that, or one basis point, is due to the acquisitions of STW. Is due to the acquisition of STW in Q2, where we picked up some 7 billion of AUM at 20 basis points. A further one basis point decline is due to the lower margin business such as QEP. Institutional margins are expected to come off a further basis point in 2014. In intermediary, margins excluding performance fees were unchanged at 78 basis points. While margins are difficult to forecast and are always subject to market levels, in 2014, we expect to see a further one to two basis point decline in the overall asset management margin. Now let's turn to wealth management. Net revenues were 64 basis points, one basis point up on a year ago. Cazenove Capital had margins very close to our existing business. But we've seen an increase due to the expected loss of the low-margin business in H2, as Mike has already mentioned. Net revenue is made up of management and transactional fees, plus net interest income. Overall, wealth management generated revenues of GBP 150 million, up GBP 56 million or some 59% on 2012. That's mainly a result of the Cazenove acquisition, with AUM increasing to over GBP 30 billion. Management fees and transactional income are both up due to the increased scale of our business at GBP 110 million and GBP 27 million. Net interest income is broadly unchanged year on year at GBP 14 million. So that brings me to the end of our look at revenue. Now, what about profit before tax? Well, as Mike said right at the start, it's a pretty good picture on PBT with an increase of GBP 148 million. This slide shows the movement year on year. You can see the impact of higher revenues of GBP 273 million there in green. Compensation costs have also increased by GBP 107 million, although we have reduced the compensation to operating revenue ratio to 46%. That's down from 49% in 2012. We have continued to keep tight control of costs, which were up GBP 22 million. That number is however flattered by the GBP 6 million credit in the group segment, mostly from Q1, which you'll be aware of. For 2014, we are expecting other costs of GBP 300 million. And I'll return to this in a minute. So that brings us to record profit before tax and exceptional items of GBP 508 million. So if you look at it by segment, you can see that the movement really comes through in asset management, up GBP 121 million. Then wealth management, up GBP 22 million year on year, and group, up GBP 5 million. Now, I'd like to take you through costs in some more detail. Here, we're talking about the numbers before exceptional items. Starting with compensation costs. Compensation makes up 71% of our cost base. Within those comp costs, 51% of our spend is fixed. The fixed spend is up 13% and continued investment in our people. Headcount has increased by 517 this year to a total of 3,528. 366 of those people come from the acquisitions we have made, and 151 from organic growth, particularly in operations and IT. We continued to recruit for our three-year investment platform program, as well as the integration of Cazenove and STW. As I mentioned earlier, we have reduced our comp to revenue ratio to 46% from 49% last year. For 2014, we expect that ratio to increase to 47%. That's because we are expecting a more normal level of performance fees. But as always, a lot depends on market conditions. Other costs, excluding depreciation, were GBP 255 million. GBP 114 million in H1 and GBP 141 million in H2. Excluding the insurance recovery of GBP 6 million, mostly in Q1, other costs are up 12% on last year. We have seen the half year impact of Cazenove, as well as additional costs in areas such as accommodation. For 2014, we are expecting non-compensation costs, including depreciation, of GBP 300 million for the full year. The GBP 300 million reflects the full year impact of the STW and Cazenove acquisitions, plus additional IT expenditure. We have to put more into IT to meet the latest regulations, as well as making the technology upgrades we need to keep pace with the demand for more complex products. The guidance I am giving you is before any exceptional items. In total, our spend is equal to cost to net revenue ratio of 65% in 2013. We expect this to increase to 66% for 2014. This is right in line with our long-term target and KPI of between 65% and 70%. I would now like to take you through exceptional items you can see in our accounts. I will also give you some guidance on what you can expect to see in 2014. At the half year, I mentioned that we expected some GBP 30 million of exceptional costs in the second half, and that is broadly where things have turned out for acquisitions, on top of the GBP 6 million of exceptional items that we took in H1. We have seen slightly higher amortization charges because we treated other amortization for past acquisitions such as Access, NFC, et cetera, as exceptional. That is the GBP 4 million of other amortization you can see in the middle of the table. As Mike mentioned earlier, we have taken a provision in wealth management for the industry-wide U.S. Department of Justice program that applies to Swiss banks of GBP 15 million. We signed up to this program in December. The provision is our best estimate based on what we know so far. It is still subject to change as the program is not due to complete for a further 12 to 18 months. For 2014, we expect to see further exceptional items of some GBP 54 million. GBP 30 million will be in the first half. The GBP 54 million is split, GBP 22 million for amortization, GBP 16 million for deferred compensation related to acquisitions, and another GBP 16 million of further integration costs. I would now like to turn to the group segment. What we are looking at here is investment capital returns offset by governance and other central costs. We had a profit of GBP 5 million compared to a small loss last year. The total return for this segment is a profit of GBP 4 million compared to a loss of GBP 9 million last year. Investment capital returns are some GBP 19 million of the GBP 23 million returns shown above. That is made up of the total net revenue, interest income, share of JVs and associates, plus what has gone through reserves. Central costs or operating expenses, as you can see on the slide, were GBP 19 million. We still expect to see a run rate of some GBP 28 million to GBP 30 million a year. For forecasting purposes, we continue to expect investment capital returns to cover costs. So a nil result for 2014. Again, this excludes exceptional items. The final part of the income statement is the tax charge. Our effective rate of tax is 20% before exceptional items. I would expect it to remain around this level for 2014. After deducting the tax charge, our post-tax profit before exceptional items is GBP 404.8 million and GBP 353 million after exceptionals. This is equal to earnings per share of 149.9 pence. Leaving the income statement and turning to capital. Overall, Schroders' capital has increased by GBP 199 million. On the last slide, we saw that the post-tax profit after exceptional items was GBP 353 million. During 2013, we have acquired GBP 142 million of own shares. That GBP 142 million works out at GBP 97 million related to acquisitions and the balance to hedge employee share awards. In May, we paid the final dividend for 2012, and in September, the interim dividend for 2013. That represents a further GBP 124 million returned to shareholders. Next, we have foreign exchange differences on our overseas operations after hedging. Net FX differences decreased capital by GBP 19 million overall. That is a GBP 46 million reduction in the second half, mainly reflecting the strengthening of sterling towards the end of the year. Together with other movements, such as share-based payments, that leaves us with a year-end position of nearly GBP 2.3 billion. This is a busy slide, but I know it is one that you are familiar with. On the left-hand side, you can see the breakdown of the GBP 2.3 billion of capital. GBP 1.1 billion is operational capital, mainly cash and other working capital balances. Regulatory capital of GBP 603 million is within operational capital. Investment capital has decreased to GBP 677 million, which mainly reflects our acquisition of Cazenove. You can see the investment capital on the right of the slide. Cash and fixed income holdings have decreased to GBP 345 million within overall investment capital, compared to GBP 784 million at the end of June. It is still a very strong financial position, which we will rebuild further during 2014. This is a key element of our long-term strategy, allowing us to invest in future growth and making sure that Schroders has the ability to repeat the record results we have reported today. To wrap up my part of the presentation, we have generated record results in 2013, both before and after exceptional items. Cost control has been good, with key cost ratios coming down year-on-year. Maintaining our operational efficiency remains a key focus. This record profitability translates into strong cash generation, and we are rebuilding our investment capital post the Cazenove acquisition. These record results and our confidence in the future outlook have allowed us to significantly increase returns to shareholders, increasing the dividend by 35%. I now hand you back to Mike. Thank you. Looking ahead, we have had quite a good start to the year, particularly in our intermediary business. Quieter in institutional, to some extent continuing the trend of the fourth quarter of last year. But we have a good pipeline of business. We have one, but has not yet been funded in institutional. I think if we are seeing a quieter period, I think it is probably temporary. Our priorities this year are to complete the integration of Cazenove Capital and STW, both of which are on track. A key date for Cazenove Capital will be the end of July when we plan to move the administration of our wealth management businesses on the Cazenove Capital side to our Zurich service center. To build on the, I think, really totally repositioned capability we now have in wealth management. We see growth opportunities in, frankly, most asset classes and most regions we're looking at. We're looking for cost efficiencies, not cost-cutting, but we want to use our scale, move towards more industrialized processes, if I can put it that way, to get better cost efficiencies in this firm so that as we continue to grow, we really try and keep a lid on cost expansion. I think there is long-term opportunity for that. Finally, I say this every time, but I think it's an important point. Please remember, we focus here very much on the long term. We're not focused on really so much this year, let alone this quarter. We're trying to think how do we position this company for the next 3-5 years, and that remains our absolute predominant focus and underlies every decision we make on acquisitions, on people, on new products, on investment, on cost efficiencies. Okay, thank you very much. Now, we'll be very happy to take your questions. There'll be a microphone coming to you. If you could just say who you are and your company to start with, that'd be great. Good morning. It's Arnaud Giblat from UBS. Three questions, please. First of all, could you maybe comment a bit more about your performance fees and your guidance? Is the proportion of AUM eligible, has that changed? Is there a big proportion of your AUM, the performance fee on the AUM, linked to absolute returns rather than relative to benchmark? Secondly, on your guidance on reducing management fees, specifically in retail, is that a mix shift you're expecting or are there other pressures you're expecting ahead? Finally, on the GBP 400 million reduction in investment capital we saw over the second half. Should we expect investment capital to stay at those levels? Richard can deal with the third one, and I'll deal with the first two. On performance fees, GBP 80 million performance fees this year, as you know. I suppose our more normalized number is around GBP 40 million to GBP 50 million. I think we're saying for conservative reasons, think more in terms of the normalized number going forward. There's been no fundamental change other than Cazenove funds have generated some of these performance fees. So it's been a combination of Cazenove funds and Schroders funds. It is alpha related, but also in some cases, absolute return related. Typically, one would expect higher performance fees in better markets. Obviously, we had a good performance in developed market equities last year. That benefited us. So there's a Cazenove element there. There's an element associated with stronger markets, and there's a big element associated with our performance. But I would say that we are modeling internally a return to a more normalized number of about GBP 50 million in the future. In terms of management fees, I think what Richard said doesn't represent any change from what we've said in the past. We are expecting fees to come under pressure in this industry, particularly in intermediary, but not only in intermediary. We're seeing it right across the piece. To some extent, our fee declined from a peak of about 65 basis points. This has principally been change in business mix. So it's been the growth of our institutional business, the growth of our multi-asset business, the growth of our fixed income business. That is what has principally driven this reduction from a peak of about 65 basis points to the 53 basis points you see today. So for me, that is a sign of success. It's exactly what we wanted to do. So far, we haven't seen much in the way of fee compression because of market forces. But I think that will come, and we've said in the past year, I think we expect to see a 15% reduction in intermediary fees over the next five years or so. So I think what Richard said today is consistent with that. Will you pick up the point on capital, Richard? I will. You will see from our annual report that we are expecting dividends from our subsidiaries to flow up the parent company of about GBP 300 million. So that will flow into investment capital in 2014. Good morning. Daniel Garrod, Barclays. A couple of questions. First on flow outlook. You had GBP 7.4 billion of flows for full year 2013. Can you comment on the size across the year, the headwinds you had out of the Schroder UK Alpha Plus fund, or just the effect of Buxton leaving more generally? That would be the first question. Second question, you commented around the restructuring and turnaround of your fixed income business. It looks like in Q3 and Q4, you had virtually zero net flows out of the fixed income asset class. Are you more optimistic underlying around turnaround being delivered than that picture would show? And what are you doing on that front to improve the consultants' recommendations with you? Thank you. I think on Richard Buxton, probably GBP 2.5 billion or something like that, but that has completely tailed off now. What we are seeing in our alpha and U.K. large cap products is the typical flows you would expect of a book of business this size. There is no impact there now. That, as we discussed before, all happened, I think, probably in the second, to some extent, third quarters. On fixed income, yes, we have had pretty flat. We had reasonable positive net inflows in institutional. We had some outflows in retail. I think that was probably an industry, not a Schroders specific factor. So retail investors taking profits in fixed income rather than anything Schroders specific. As I said in the presentation on that part on fixed income, I think it is positioned for growth. We have made some people changes, some important people changes. We have a much stronger team here in London, in Asia, in the U.S. You have seen the performance trend, 70% outperforming over three years, 78% over one year. It takes time for consultants to buy into that, even if they rated the individuals in the previous firms they worked at. As you know, when there is a switch like that, they take time before they buy into that same individual in a different firm. That I think is now happening. We are seeing consultant upgrades in many areas, and I am very positive about this capability. It is the strongest fixed income capability we have ever had at Schroders, without a doubt, in terms of talent, process, products, and performance. When it comes through in significant flows, we cannot obviously judge, but in terms of are we happy with where it is positioned and do we think it is going to do well, absolutely. Thank you. Thanks. Morning, it is Bruce Hamilton from Morgan Stanley. I have got three or four, if I may. Firstly, just on the capital position again, can you remind us what the surplus or excess above the required minimum reg cap in the operating divisions is? So in terms of that billion or just above that you have against asset management and private bank. Secondly, on the cost saves within Cazenove, how far are you through the GBP 12 million-GBP 15 million of savings? So how much more to come? Thirdly, back to fixed income. Could you just give us some sense of how much of your asset base there is unconstrained areas, absolute return areas where growth might look more likely versus the traditional core benchmark stuff that could be a bit more of a flow risk? Finally, just on the outlook, in terms of you've obviously given us a little bit of color at the start of the year being good in intermediary, kind of okay in institutional. But as you look ahead in 2014, any sort of color around geographies that you think look more or less interesting and around any product shift? For example, in multi-asset, would you expect that the demand for income gives way to more risk-controlled growth given the performance of markets? Any sort of color there would be helpful. Richard, will you pick up the first two? I will pick up the asset base and fixed income, and then Max, maybe you'd like to talk about product flows this year. Bruce, the first question, I think, was surplus operating capital. Within operating capital, there's GBP 468 million over and above the regulatory requirement. I'm sorry. I was looking for the answer to the first question. The second question? Gosh. The cost savings in Cazenove to date. Out of that GBP 12 million-GBP 15 million, how much has already been delivered in 2013, if you like? In terms of the cost savings from Cazenove, most of that will actually come through in Q4 this year, in that we are still maintaining the Cazenove platform. As part of the migration to the Swiss service center, which is currently scheduled for the summer, we are still carrying those costs. Really, the benefit of those cost savings in Cazenove will come through in Q4. So we should expect, say, a GBP 10 million drop in Q4 or something of that order of magnitude in Q4 2014? Philip, that match? I would say a little bit less. I think with some of the cost savings with distribution, which came through last summer, I would say 50/50, probably. Taking the whole. On your question on bonds. The absolute return unconstrained, these are relatively newer strategies for us. They are growing pretty well. As a proportion of the total, it's relatively small. Having said that, we have a pretty diversified business. Our biggest single product, our global bond, is GBP 10 billion. We then have five products at about GBP 5 billion each. So we have long-duration bonds. One of those GBP 5 billion products will be long-duration U.S. bonds with STW. Actually, we think if yields back up again, that we could see more flows into that business with people moving to immunizing portfolios and so on. I think we don't see significant risk in the index relative, as you refer to, or more core areas. I think it's more we see growth opportunities in some of these more unconstrained areas. Massimo, will you pick up the last one? Bruce, as you might be already aware, last week we published our Retail Investment Trend Report. This is a survey we implement every January on a sample of about 15,000 people in more than 20 countries, and that give us the indication on investor sentiment. That doesn't mean there is a check waiting the next morning, but that give you more or less where the middle and upper middle class saver are in their state of mind. The message was that a majority of them were more positive and more likely to invest or continue to invest than last year. 70% were looking at equity. So moving out of still a significant portion of assets in cash and fixed income and investing to equities. That was quite differentiated across country, and as you would expect, the more equity-friendly countries like the U.K. and the United States, were leading those allocations. That might give you a broad sense of where the sentiment is in the market. Because it's a sentiment, that might change very rapidly based on a political or economical turnaround situation. What we are seeing today is a strong business coming out of the U.K., out of Europe, and a restart in Asia, geographically. We continue to see interest in income, and while there may be an exceptional wave last year, due also to the fact that we created a new space with the Asian and Global Multi-Asset Income over the last couple of years that has been copied by most of the competitors, I would say almost all the large ones now. The demand for income is driven by economic and demographic factors. It is there for the long run because it answers to a specific aging middle class need. We are well suited for any other type of turning strategy for more dynamic balanced because we have the full range in controlled growth or risk-managed growth as well as income. Multi-assets, in our view, will continue to be a long-term dominant part of intermediary demand. Tactically, this year, we are seeing a surge in equities as well, and that, in our view, will continue and actually might even increase after the market has settled down due to the instability that has been happening in February and early March. Hi, good morning. It is Gurjit Kambo, Credit Suisse. Just a couple of questions. Firstly, just in terms of the funds you are seeing in terms of flows, and if some of these trends which you have highlighted in the report materialize, do you see any sort of risk of not having the right products or capacity constraints in some of the funds? In terms of product range, I think we are well prepared, as I mentioned, because in fixed income as well, which continue to be a significant part of demand in more cautious country like Southern Europe, for example, we have moved most of our capabilities into either total return, unconstrained or higher alpha strategies. So it become much more of a specialist that is well designed for the current environment. The second part of your question, sorry? Just is there any sort of funds which are basically at capacity or nearing capacity? Yeah. Well, we manage capacity, as you know, very carefully. It is part of the quality of our offering, and we are very careful in continuing managing it on a day-to-day basis. To give you an example, last year we hard closed three funds, two Cazenove funds, the Absolute UK Dynamic and UK Smaller Companies, and the Long-short GAIA Egerton Equity Fund. We also have, at the moment, six soft closed funds. And there again, they are mainly in UK equity, UK high alpha sector, some of which will probably become hard closer in the coming months. We are also managing the capacity of the UCITS version of the Catastrophe bonds that has been so successful that we think we will have sold out the UCITS way to manage it by the end of April, in just six months from launch. So that is part of the management. However, we do have 650 funds around the world. We manage over 200 strategies. So the limitation in capacity in one does not mean that we have a full market limitation. I think a good example was we closed our Asian Multi-Asset Income Fund, which was very successful. We probably talked about this six or nine months ago. We closed that, and we launched as a follow-up, a Global Multi-Asset Income Fund. So, it is an example of success but also success of strategies to pick up that opportunity. Just one very quick question, just in terms of the market moves. What proportion of that was linked to FX? Just give us some sort of number there, roughly. In terms of FX, broadly where we started this beginning and end of the year were broadly the same. There were three currencies that really moved, and that was AUD, JPY, and Indonesia. It is quite difficult to look through the impact on AUM. But certainly, those three countries are the most affected. And Australia was probably impacted by about 2 billion in terms of AUM number you see. And I would guess a similar sort of number in aggregate for the other two currencies I mentioned. But that is very broad. It is quite difficult to actually look through between markets and FX, but that is broadly how FX impacted AUM. Thank you.