Earnings Call: H2 2011

Mar 8, 2012

Okay. Good morning, everyone, and welcome to the Schroders 2011 results presentation. This was a good performance in quite a challenging environment, particularly in our intermediary business, with retail investor demand falling away progressively throughout the year. Profit before tax at GBP 407.3 million was marginally ahead of 2010, which itself was a record year. Earnings per share were up 4% to 115.9 pence. The dividend will be increased by 5% to 39 pence per share. Our long-term performance numbers are still very competitive, with 70% of funds outperforming benchmark or peer group over the three years to the end of 2011. We generated net new business of GBP 3.2 billion in the year, and assets under management ended the year at GBP 187.3 billion. The underlying quality of earnings has also been, I think, very strong. Profits from our two operating businesses, asset management and private banking, are up GBP 22 million. Management fee income in asset management is up by 8.8%. Performance fees are down by GBP 36 million for two reasons. First, because, as you may recall, we had a GBP 22 million one-off performance fee in our property business in 2010, which was not going to be repeated. Secondly, in this market environment, it's obviously been harder to generate performance fees. Notwithstanding that, our profits in asset management are ahead to GBP 389.4 million, up from GBP 381 million. We've seen a very sharp rebound in the profitability of private banking, more than doubled to GBP 23.8 million. Our net revenue margins, excluding performance fees, are down by 3 basis points to 57 basis points, reflecting the growth in our institutional business in the last two or three years. We have continued to invest quite significantly in organic growth, not least in talent, and we've added 180 people to our headcount during 2011 across the board in investment, in distribution, and in infrastructure. Notwithstanding that, our compensation to revenue ratio has come down to 44% and our cost income ratio is down to 66%. Looking in more detail at investment performance, our three-year numbers, as I said, are still strong, with 70% of funds outperforming benchmark or peer group in the three years to the end of December. Our shorter-term numbers have been less strong, impacted by the extreme volatility in markets in 2011. The macro picture, I think overwhelming fundamentals in many cases, and our 12-month numbers are in the mid-40s, which is where they were when we last talked, which I think was at the end of the third quarter. The very short numbers have improved, and many of the asset classes where we were underperforming on a 12-month view have picked up in the last quarter and are back into first quartile territory. More importantly, some of the asset classes where we've had shorter term, less competitive performance still have very strong three and five-year numbers. For example, our Euro corporate bond business, fourth quartile over one year, third quartile over three, second quartile over five. This is a big asset class for us. UK Alpha Plus, third quartile over 12 months, but first quartile over three years. Our income strategies, fourth quartile over a year, first quartile over five years. Emerging market equities, second quartile and second quartile over five years and still seeing good inflows. Our UK Mid 250 fund, fourth quartile over one year but first quartile over three years. Emerging market debt, second quartile, first quartile over five years. Our diversified growth fund, first quartile over three years. For us, the principal focus is on these three and five-year numbers, which are still, as I say, quite competitive. Looking at the institutional business in a little more detail, we had a very strong year. I think our second strongest year in terms of net flows at GBP 6.8 billion. We had GBP 600 million of net outflows in the fourth quarter for two reasons. First of all, we had a GBP 1.1 billion outflow from one European financial institution who decided to take the funds back in-house for strategic reasons, nothing to do with performance, which fell in the fourth quarter, GBP 1.1 billion. Secondly, we have seen a lower level of new business activity in institutional in the fourth quarter and continuing into this year. I think simply a reflection of the very uncertain market environment in which we find ourselves. We had a strong performance in terms of new business in the U.K., in Asia, and in the U.S. In multi-asset and equities, both of which generated GBP 2.9 billion of net inflows in institutional in the year, also in fixed income. We had small net outflows in continental Europe and in alternatives. In the last two years, we've generated GBP 12.9 billion of net inflows in multi-asset and fixed income in institutional. We've also grown quite rapidly in sovereign wealth fund and insurance companies space, and these tend to be big mandates on lower fees. As a result, we have seen a small decline in our net revenue margins to 39 basis points in the last two years in institutional, from 40 basis points in 2009. Against that, we've seen quite a material increase in longevity. Over three years, the average has moved from 4.2 years to 5.3 years, so a 25% increase. If you take it on a one-year basis, we're a little bit above six years. This strategic push into multi-asset and fixed income in particular, brings with it lower net revenue margins, and we expect that trend to continue, but greater longevity, and it's exactly where we want to be. We have a good pipeline of net new business, which has been notified but not yet funded. As I said a moment ago, we are seeing a slowdown in activity levels, I think reflecting the industry experience and very much linked to these very uncertain markets. We had GBP 3.8 billion of net outflows in our intermediary business. Reflecting, first of all, the significant European book of business we have, and as you know, the industry had very big net outflows in European retail, particularly in the second half of the year. Secondly, as we've said before, we have closed a number of funds for capacity reasons, and that accounted for GBP 2 billion, approximately, of net outflows in intermediary during the year. Thirdly, I think at the margin, some of the shorter-term performance challenges I mentioned impacted flows. Lastly, we have, and the industry's seen a concentration of demand in intermediary, very much around go-anywhere absolute bond mandates. In some of those areas, we haven't had competitive products to bring to the marketplace. I'll talk about that later on. There has been a significant concentration of net flows, particularly in Asia, but also elsewhere, in a very narrow set of products. We had obviously big outflows in Europe, GBP 2.6 billion, and a further GBP 1.1 billion in Asia. So basically, Europe and Asia accounted for all the net flows in our intermediary business. We had positive net inflows in the U.K. And over 30% of our new business has been in insurance-wrapped and pension-wrapped products, longer-term savings channels, which is having a beneficial impact on longevity also in this channel. Year to date, we have seen net inflows in the first two months in our intermediary business, as we said in the statement. Asia continues to be difficult. Europe has turned positive. U.K. is still positive. So it is pleasing to see quite a significant turnaround with net inflows year to date. But we believe we are still in a very volatile market environment. There is still a lot of concerns in the Eurozone, and we are not forecasting a sustained turnaround either in markets or retail investor demand. We have a number of very interesting new products we are bringing to the market, some of which we launched in 2011 on this slide, some of which we will launch this year. They are basically grouped around two themes, outcome-orientated products and income, aimed at the institutional and the intermediary market, and particularly DC. So we probably see a better roster of new products coming to the market than we have seen for quite some time, and we are very excited about the potential for these products, many of which we have seeded with our own investment capital before we bring them to either the intermediary or the institutional marketplace. For the private bank, it was a year of consolidation in terms of net flows. After the very strong inflows of GBP 2.4 billion in 2010, we had GBP 200 million of net inflows in 2011. We had a significant increase in revenues, 11% to GBP 114.3 million. Costs are slightly down by 3%. We have had no further bad debt charges, and our profits have more than doubled from GBP 10.1 million to GBP 23.8 million. So we are very pleased with the momentum in that business and the significant recovery and growth in profits that we forecast at the beginning of 2011. I am now going to hand over to Kevin to talk in more detail about the numbers, and I will then come back at the end to say a few words about the outlook. Well, good morning, ladies and gentlemen. In a moment, as usual, I will take you through the results. The slides will be largely familiar to you if you have been to these presentations before. But this time, I have also included a few extra slides on the group segment, which I hope you will find helpful in trying to forecast how that part of our group performs. You will also receive our report and accounts on the 23rd of March. In there, you will find a more detailed financial review commentary than previously that we have co-located with the financial statements themselves. There is also an enhanced description in there of our business model and how that ties into our strategy. In the notes to the accounts, you will find some plain English where we try and explain what the notes show to try and make it easier than understanding the technical definitions of IFRS. We hope that all of this will enhance the transparency of our reporting this year and declutter some of the more trivial disclosures that have crept in in recent years. In due course, we certainly welcome your feedback on that. Reversing to the results of the day, I will start with some key numbers as usual, and then provide some context, giving you commentary on the drivers of the results. I will end with one or two slides on group capital. Profit before tax is GBP 407.3 million, largely unchanged on 2010's pre-tax profit of GBP 406.9 million. There are some notable changes in the source of profits this year. Taken together, the operating businesses, that is asset management and private banking, have outperformed their highest previous profits, which were recorded last year in 2010. The profit in the two operating segments indeed are 6% higher than last year, and I will take you through that in a bit more detail shortly. In the year, there were some notable quarterly differences. In the first half, we reported two strong consecutive quarters. Together, the profit before tax and performance fees produced record results for any half year. The PBT was GBP 103.8 million in the first quarter and GBP 111.9 million in the second. The effects of high market volatility experienced in July onwards and the change in the relative proportions of our asset classes reduced profits in the second half, having the greatest effect on the quarter 4 results. The third quarter profit was GBP 101.6 million, and the fourth quarter was GBP 90 million. I will come back to the impact of margins later in this presentation. Moving to costs, the cost to net revenue ratio has improved by one percentage point from 67% last year to 66% in 2011. We made cost savings throughout the year whilst continuing to invest in people and infrastructure in line with our strategy for growth. Due to staff hirings, there was a slight increase from the half year ratio of 65%. Earnings per share is up 4% from 2010 at 115.9 pence per share, and that is despite the profit before tax being largely unchanged. It benefits from a lower tax charge and from buying in some non-voting shares. The board has recommended an unchanged final dividend of 26 pence, which brings the full year to 39 pence. That is 2 pence or 5% up on 2010 and in line with the growth in our profits from the operating segments. That will be paid on the 11th of May this year. I will now move on to look at the components of the profit before tax to see how these have changed, while still coming out at roughly the same number as 2010. Starting with 2010's profits, GBP 407 million. We have a decrease in net revenue of just GBP 3 million. I will take you through that first in greater detail. This is 2010's net revenue, GBP 1.156 billion. First, we benefited from the strong net new business performance, particularly in 2010, where you will recall that we had GBP 27.1 billion of net inflows. We have got the full year effect of those flows. Then there is 2011's net new business amounting to GBP 3.2 billion. The total effect of those wins is to add GBP 64 million to our revenue. Favorable markets for just some of the year also increased revenue by GBP 24 million. World equity markets, I guess, are best described as being a bit like a yo-yo. They rose, then they fell, and then they staged a very late recovery at the tail end of the year. On average, they showed an overall year-on-year gain of about 1%. We have got a relatively small benefit this year, coming in from markets. Performance fees are GBP 36 million lower than they were in 2010, at GBP 37.8 million. 2010 was abnormally high, where you may recall we had a GBP 22 million benefit from the closure of the Schroder European Property Fund, a terminal performance fee on that fund. So excluding that one-off, performance fees are just GBP 14 million lower on our routine arrangements. Market volatility in the second half and some high water marks achieved in 2010 curtailed the level of performance fees. But overall, at GBP 37.8 million, they are in line with our broad long-term estimate, which is around about GBP 40 million a year. Notable fees were earned in 2011 on Asian equities and on commodities. Finally, we have got the group segment, where revenue was down GBP 55 million. There was a large swing in returns on seed capital, and the investment income decline to some extent is offset by higher interest income, which obviously doesn't go through the revenue line. I will take you through the group segment as a whole later in this presentation. Those differences explain the change in revenue. As I say, overall, just a net GBP 3 million down, but there are some reasonably significant components to that change. If I now color in those gray bars, you see the revenue by segment. We see that the core operating income from both asset management and private banking has grown and is offset by the lower revenue in the group segment. The quality of the profit, as Mike has referred to, I think has improved by the much higher quality revenue that we have seen in 2011. I will now revert to reconciling the profit. That is what we had before, the profits and the swing in net revenue. Compensation costs have decreased by GBP 6 million. This equates to a 2011 comp to operating ratio of 44%, marginally below last year's level and the same as reported at the half year. It is somewhat lower than I was anticipating for much of the fourth quarter, as we did benefit from the market rally in the final fortnight of 2011. As for the year ahead, it is, of course, early in the year to predict a comp to revenue ratio, and the outcome is undoubtedly dependent on market conditions and the extent of recruitment of talent. Therefore, for forecasting in current market conditions, I would not change from our long-term cyclical target of 45%. Other costs were down a net GBP 6 million compared with 2010. I will revert to the main elements of the costs later in the presentation. Net finance income has increased by GBP 5 million. This is part of the investment capital return that I referred to earlier, and it is higher due to a complete year of cautious investment of our capital. Finally, there is the contribution of our non-managed businesses. That is the joint ventures and associates. That has fallen by GBP 14 million compared with 2010. Profits in the Chinese joint venture was GBP 4.4 million lower at GBP 5.7 million. They had a year of consolidation without being granted any new official quotas to launch new products. There were also losses, I should say, of GBP 4.7 million in our private equity associates, SPHL, and that compares with a gain of GBP 4.3 million that we had in 2010. The net is a swing of GBP 9 million. China and SPHL account for that decline in the non-managed businesses. In aggregate, the profit comes back to GBP 407 million. As for the previous slide, if I color in the gray bars, you'll see that there is a 6% increase in profits for our core asset management and private banking businesses. This is, I think, the other reason why I would particularly point to the quality of profit being strong in the year that's just ended. I'll now go on to talk about revenue by sales channel, and I'll start with the institutional channel in asset management. Net revenue from our institutional business was GBP 454 million. That's up GBP 21 million on 2010. The increase is unchanged from the first half because the higher performance fees that we had compared with the second half of the year. Excluding performance fees, net revenue is up GBP 61 million. That's 17% on a year ago. Reconciling that, GBP 21 million of the change is attributable to the net new business that came from 2010's wins of GBP 16.8 billion in institutional channel. We've got the full year effect of the 2010 wins. Then there's a GBP 14 million improvement in revenue from the GBP 6.8 billion of institutional wins in 2011. Those wins were in all regions except Continental Europe, with a particularly strong showing in the U.K., and the net sales were mainly in multi-assets, particularly in LDI and in equities, particularly in QEP. GBP 26 million of the increase is attributable to markets, and this includes the effect of the strong market growth that we saw through to July. Performance fees fell in 2011. However, the GBP 40 million reduction in institutional performance fees includes that GBP 22 million property one-off that I referred to earlier. There's an underlying GBP 18 million reduction in performance fees. That was due to a number of high water marks not being passed and the volatility and the short-term performance challenges that Mike referred to. The institutional channel has seen strong core business growth. Moving to intermediary, the other sales channel of the asset management segment. Net revenue for our intermediary business is up GBP 25 million on last year, and that includes GBP 4 million higher performance fees. The increase in net revenue excluding performance fees is due to the full year effect of GBP 7.9 billion of net new business that was won in 2010. There were no significant inflows, though, in the first half of 2011, and there were outflows in the second half, mainly from Continental Europe, with a resulting reduction in income of GBP 2 million. The outflows were in most asset classes, although there were good inflows in multi-asset. In contrast to institutional, market movements have reduced net revenue. This is a function of the market volatility as well as the greater proportion of fees that are earned in USD. The dollar obviously weakened against sterling. Most retail funds are daily priced with daily management fees, whereas institutional funds are often based on month-end or quarter-end valuations. With much of the fourth quarter being weak, the different management fee convention was detrimental to intermediary fees. Overall, market movements in the two halves netted off and the net revenue reduction of GBP 2 million was entirely attributable to FX. Progress in the intermediary channel is really attributable to 2010, and 2011 just about held its own. If I pull that together, the graph on the left-hand side of this slide just summarizes the two graphs that we have run through. Dealing first with performance fees, they account for 2 basis points reduction in margins. One basis point is attributable to the property performance fee and the other decline I have already discussed in the two segments. But moving to the underlying margin, excluding performance fee, this is reduced by 3 basis points to 56 basis points. That is 1 basis point lower than at the half year. The year-on-year reduction of 3 bps is attributable to three factors: the sales channel mix, the asset class mix, and transaction fees. Each coincidentally accounting for 1 basis point. The balance of our business has shifted more to the institutional channel, which is a lower margin channel than intermediary. Institutional business now accounts for 63% of assets under management, compared with 59% a year ago. On the product side, we have been working to diversify the asset class mix. We have been successful at doing that. Fixed income and multi-asset now represent 41% of our assets under management, compared with 36% a year ago. As you know, these asset classes have inherently lower margins. We also receive some transaction-based fees and other fees that are not related to the value of assets under management. As our average assets under management grow, and the average did grow across the year as a whole, if the revenue does not change, then as a percentage, that declines. We have lost 1 basis point due to transaction fees being about the same level, but you are dividing by a bigger number, by a higher average assets under management. I think in summary, the decline in margin is consistent with the strategy of diversification by channel and by asset class that we have been following for a number of years. Looking to 2012 margins, a lot depends on markets. Clearly, the stronger the equity markets, the less pronounced will be any margin decline and vice versa. However, in line with our strategy of continued progress and diversification, and assuming that continues to take place in multi-asset and in fixed income, I think it would be wise to assume that we are going to see a further decline in margins of a basis point or two in the year ahead. Now turning to private banking. First revenues and then costs. The three components of private banking revenues, management fees, transactional income, and net interest income. Overall income is 11% up at GBP 114.3 million. Management fees, that is the dark blue, have increased 16% to GBP 75 million, benefiting from the record net new business wins of GBP 2.4 billion in 2010. This is the highest quality revenue being income-based on assets under management. Performance fees of GBP 1.2 million are included in that little change from GBP 0.8 million last year in 2010. Transactional income in orange has increased by 7% to GBP 24.9 million. Clients being slightly more active in terms of dealing in the current year. Net interest income in lighter blue is reduced slightly by GBP 0.9 million. I move to costs. Starting with staff costs are in gray. They are largely unchanged at GBP 55 million. There has been a reduction in compensation cost per head, consistent with the rest of the group. This is partially offset by the effects of recruitment, so that pulls it back up. There is, of course, a full year effect to take place of the recruitment that took place in 2010. We have not had any change in provisions during the year, neither charges nor credits. The absence of provisions accounts for GBP 7.4 million of the profit improvement. Other costs have increased by GBP 5.1 million. The Private Bank’s back office is in Switzerland. The appreciation of the Swiss franc against the pound has increased costs in sterling terms by about 5%. Other than that, the increase includes costs associated with the formation of our Singapore bank, and notably the migration of clients onto the Swiss platform, and the costs associated with servicing the new clients that were brought in the U.K. last year. That brings me to the group segment. I said earlier that I would include some slides on this for the first time. The accounting in the group segment is confusing. For example, income gains and losses go through revenue unless it is interest, in which case it goes through net finance income. Revenue can be negative if there are market losses. What I am going to do is to recut the number and put it in economic terms for you. The same overall result, but splitting it between the two parts of the group segment. I am going to just take you through the economic outcome. I am going to start with the governance management line, the 29.9 versus the 15.5 on the slide. There are a number of one-off items in both 2010 and 2011. The items are recorded on this slide. Fundamentally, the costs here, the bottom or the penultimate line on the slide, the costs here are about the offices of the chairman, the chief executive, the CFO, and the governance cost of the group, things like audit costs. We also have, though, a number of sundry items that are at the top of this slide. In aggregate last year, they were immaterial, only coming to GBP 1.8 million. This year, we have got material non-recurring gain, which ameliorates the low investment income that I will come to on the next slide. Let me take you through those line items. Prior to 2010, we had a PE, private equity, admin business in Bermuda and Guernsey. We disposed that business last year in line with the wind down of our private equity activities. The combined trading results and gain on disposal realized a profit of GBP 5 million in 2010. Obviously, there was nothing to recur in 2011. Each year, we mark to market deferred compensation awards. The group hedges the cost for asset management and private banking. The amounts shown here on the second line negate the reverse of those numbers in the asset management and banking segments. The combined result is a net zero for the group, but the hedging gain or loss goes through the group segment. We have got quite a large pension fund credit in 2011, and this is a curtailment gain because we closed the U.K. defined benefit scheme in April 2011, and that has given us a gain of £10 million on the curtailment of the scheme. There are some property provisions in 2010 that have not repeated in 2011, and that was due to dilapidation reassessment of our portfolio of properties, and there was no adjustment required in 2011. In aggregate, we have got a £12.8 million gain going through the group segment. Then we have got the routine costs of the governance and management, which are down £28.3 million from £31.7 million in 2010. I will come back to do all of the costs as usual in a minute. That is one part of the group segment. Hopefully, that is reasonably clear. Then we have the investment capital, which is the other part of the group segment. The total results of the investment capital is a profit of £9.6 million, down from £45.7 million in 2010. Investment capital comprises three elements. The first is the actively managed portfolio of securities. This is the surplus capital that we seek to deliver an absolute return on using a LIBOR plus target. Second, we have got seed capital, which supports products in the course of development, which are establishing a track record. Third, we have got the legacy illiquid investments that we are not able to actively manage, the private equity and some property. Taking those in turn, in terms of the actively managed portfolio, I am pleased to say it did achieve a positive return in 2011. You will recall that in spring of 2010, we de-risked the portfolio, and that strategy prevailed throughout 2011. In the light of the economic uncertainties and market volatility, we did not put any risk back on the table throughout the year, and we continue to be cautiously positioned. The seed capital result was weak. It turned in a loss of £3.7 million. We hedge out market and currency risk on relative return products, but we do not hedge out absolute return products, and we cannot hedge out alpha. The seed capital was not immune to the short-term relative return challenges that Mike referred to on his slides, and it has incurred a small loss. I would, however, note that the purpose of seed capital is not primarily to generate a return in any accounting period. It is to develop products that are commercially viable for the future. Finally, there is the private equity and property. We generated a profit in the income statement, but this includes gains on realizations that have previously been recognized in reserves. As you can see on the screen, the income from the return on investment capital was £9.6 million, substantially down from £45.7 million due to the repositioning of the investment capital to be cautiously managed and the seed capital losses. Now I am going to revert to the group as a whole and revert to the costs as usual. These are the consolidated results now, not the group segment results. I will start with the staff costs. This represents 66% of our cost base. In 2011, we continued to invest in our people and to reward success. In particular, headcount increased by 180 people across our business to support the growth that we saw in 2010 and to ensure that we continue to grow in the future. As I mentioned earlier, we had a comp-to-revenue ratio of 44% in 2011, which is down from 45% in 2010. To avoid any confusion, we have excluded the pension curtailment gain of GBP 10 million that I referred to. So the 44% is the underlying amount. If you try and do the calculation yourself, you will probably come out at 43-point-something. But 44% is a proper underlying number, excluding the one-off gain. So if you exclude that gain, there is a small increase in compensation costs to an underlying GBP 510 million. Other costs were GBP 247.9 million, slightly lower, mainly due to the absence of charges for doubtful debts in private banking and a general focus on managing our costs. Increased spending was on marketing, IT, travel, and accommodation, and it was offset by cost reductions elsewhere. Depreciation amortization has reduced mainly because some assets have come to the end of their lives and are fully depreciated. In terms of 2012, looking forward, I expect other costs, including depreciation, so other costs and depreciation on this slide to be the order of GBP 275 million. That is up from GBP 262 million in 2011. In particular, we are incurring extra costs on IT systems, particularly in the front office and in investment. That alone will add GBP 7 million to our annual cost base. The overall result is, I think, the costs have been tightly managed and has resulted in an improvement in the cost to net revenue ratio to 66% compared with 67% last year, just slightly higher than the 65% that we reported at the half year. The final component of the income statement is tax. The effective tax rate has reduced to 22.5% for 2011. That is obviously below the U.K. rate, which will be 26.5% for a December year-end and lower than the 23.5% in 2010. It is a little bit lower than the guidance that I gave in August, mainly because we were able to use net operating losses in the States to reduce the tax charge. The tax rate is likely to remain around about the 23%, depending on geographic split going forward. After deducting the tax charge, the post-tax profit for the year is GBP 315.8 million. That is equivalent to earnings per share of 115.9 pence, 4% up on last year's 111.8 pence. Half of that increase is attributable to the share buybacks during the year. The total dividend of 39 pence is 22% up on an IFRS basis and is covered three times and 5% up on a traditional basis. I am now going to leave the income statement and do a couple of slides on capital. The total group capital was GBP 1.9 billion at the end of 2011. That is GBP 102 million up on the 2010 figure of GBP 1.8 billion that is on the screen. First of all, there is the post-tax profit that I have just shown you on the previous slide, GBP 316 million increases our group capital. We spent GBP 122 million on share purchases. If I just give you the components of that, GBP 59 million was spent acquiring voting shares into employee benefit trusts to hedge deferred remuneration. We spent a further GBP 43 million acquiring non-voting shares into treasury that we subsequently canceled, and another GBP 24 million buying shares that were immediately canceled. There was a small offset issuing shares associated with the exercise of options. Following all of that, the net result is that the current ratio of non-voters to voters is one non-voting share to four voting shares. Dividends amounted to GBP 105 million. This is, of course, on an IFRS basis, so that's the amount paid during 2011, which is 2010's final dividend and 2011's interim dividend. Not the final dividend that we've just announced. Other movements included share-based remuneration credit offsetting a similar charge in the income statement, mark-to-market movements on various investments and foreign exchange differences, but overall, a very small GBP 13 million credit. That leaves us with an increase of GBP 102 million and GBP 1.9 billion of group capital. Finally, I'll just analyze that GBP 1.9 billion. Operational capital is GBP 884 million compared with GBP 864 million at the end of 2010. It's mainly represented by cash and other components of working capital and reflects the profits for the year that have been remitted to investment capital. It includes GBP 501 million of regulatory capital. Investment capital amounts to GBP 837 million compared with GBP 774 million last year. It increased due to amounts remitted from subsidiaries and was offset by the share purchases and the dividends that I referred to. We anticipate approximately GBP 250 million of dividends from subsidiaries will be remitted in 2012. The final component of capital is goodwill and intangibles. The increase is attributable to investment gains on the DB pension fund, which is now closed. There haven't been any acquisitions during the year. Overall, GBP 1.9 billion. The components of it, for the record, are there on the right in the pie chart. Very little change to the previous two half years, so I won't dwell on that, but it's there for the record. With that, I'll pass the microphone back to Mike, who will make a few concluding remarks. Thank you, Kevin. Just to clarify one point, I think Kevin referred to operating losses in the U.S. in the context of the tax charge. I think the U.S. is profitable. Tax loss carry forwards, but the U.S. business is profitable. Let me just say very few words about the outlook. We see a much more positive turn in markets in the last few months. That has led to a recovery in retail investor demand. As I said earlier, we've seen positive net flows in Europe, perhaps surprisingly. Positive in the U.K., but still outflows in Asia Pacific. I have to say that we've seen some slowdown, which we saw in the fourth quarter, and I think it's continuing into this year in terms of institutional activity. I think just simply because of the uncertainty in markets, but we have a good pipeline of business we have won, but which has not yet been funded in institutional. Our view is that the Eurozone is a long haul and there is going to be no quick solution to this, and we will see plenty of volatility and uncertainty. We are not looking for a sustained recovery in markets or retail investor demand. I think it is going to continue to be quite choppy. Longer term, our three and five-year numbers are still very competitive in terms of performance. As you saw, we have a very interesting, I think, set of new products we are bringing to the market, both institutional and intermediary. As always, we think the long-term growth opportunities in our business, both here in the U.K. and internationally, are very exciting. We will continue to invest behind that in talent. We added 180 people last year. We were not, I think, as many this year, but we are certainly looking to add talent and investment in particular. That may, as Kevin referred to earlier, push up the comp to revenue ratio by a point or so. We have got quite a significant new program of IT infrastructure investment to support the investment platform, which will add to cost again, as Kevin mentioned, over the next two or three years. Finally, we are looking at new markets. We are very well represented, as you know, 35 or so offices around the world, but there are always new markets opportunities opening up, and we are looking at a couple of those. Again, that could well lead to short-term investment this year before we get long-term returns in the future. Thank you very much for your attention, and we are happy to take your questions. If you could just identify yourself and your firm first, that would be great. Good morning. It is Peter Lenardos from RBC. I just had a question on your regulatory capital. I believe Kevin mentioned that regulatory capital at the year-end was GBP 501 million, and it seems to continue to be decreasing. I guess, what is the reason for the decrease in the reg cap? It is slightly lower than last year. The main reason for the decrease is the closure of the DB pension fund, and there is also some tightening of operational risk. Four quick questions, please. Could you just identify? Sorry. Haley Tam from Citigroup. Firstly, just on new business margins. Can you tell us what the new business margin is now in institutional business? Well, I think we showed 39 bps in 2011 in institutional. We said that we expect that to edge downwards. It has come off one point in two years, so very marginal reductions. This is ex performance fees. But we do expect that to edge downwards further as we continue to pick up multi-asset and fixed income business. And that is coming in at, is it 20 basis points this time around? No. More than that. Okay. Thank you. Second question also on new business margin. You mentioned that a lot of your retail flow is now coming in in tax wrap, longer term products and tax wrap. Is that having any impact at all on the new business margins? Massimo, would you like to pick that one up? Well, first of all, it depends very much in which specific market and channel segment you are talking about. In unit-linked, for example, it does not affect our margins. Wherever we have a branded product, it tend not to affect our margins. But of course, the more we do in the U.S., the U.S. comes at a slightly lower margin, for example, than the U.K. or Europe. So the effect is very much going to be a blend of specific products, specific markets, and specific distribution segment. Having said that, we could expect a step-by-step reduction in margin and a contrasting effect of increasing longevity. The final effect on net present value could be actually not much or even positive, because the insurance channel and the defined contribution or other form of long-term saving, tend to have a much better longevity than the private banking or other form of wholesale segments. Thank you. And actually, one final question then, just on the group income slides. Thank you very much for giving us those. Just to make sure I'm looking at this correctly, going forward on slides 18 or 19, forecasting purposes, should I be comparing that GBP 28 million of normal costs- Yeah to whatever I think your investment capital returns will be? I think precisely, Hayley. I think you should assume that there is zero from one-offs at this stage, and I think the underlying cost of GBP 28 million would be offset by whatever is made on investment capital. So I think exactly what you said. Okay. So in order to avoid making a group loss this year, we need you to put some more risk on and make a higher return, essentially. Indeed. Or indeed, the seed capital outperforming better. Thank you. I don't think, however, you should regard as the fundamental objective that a negative GBP 5 million result is a problem, and therefore, we're going to put risk on. That would be the wrong conclusion. Absolutely. Good morning. Daniel Carrigan from Barclays. A couple of questions. First, on the flow side, you mentioned about the intermediary outflows being impacted to the tune, I think you said GBP 2 billion by funds where you'd close through capacity issues. I was wondering, are there any other funds you would flag that could see potentially capacity issues in 2012 that could change that retail flow outlook situation there? Second question is on the performance track record. You're clearly highlighting you're pleased with the three-year and the five-year, but there's been some deterioration, mid-40s outperformance of benchmarks on the one year. Same at Q4 as against Q3. You've obviously now had two months worth of 2012. How has that progressed in 2012? Obviously, there's a risk that the longer it stays down at sort of a 40, that it starts spreading into the three year. Is there any evidence of that? If it continues for another three, six months at that 40%, is there a risk that you start getting an impact there? I think on the capacity point, there are no significant funds coming up, which we expect to close. We've got some funds soft closed, some of our European high alpha equity funds, for example, but I don't think there's anything significant which is pushing up against capacity limits. On performance, I think I said that the performance this year, and to some extent late last year, has picked up in quite a number of strategies, and we've gone from fourth quartile to first quartile in strategies. We've had very strong performance in U.K., for example, UK Alpha and Income. But we certainly don't focus on performance on a monthly or quarterly basis. Some people may, but that's not our interest and hopefully too much of our clients' focus. We're looking much more at the longer term returns. But as I say, the very short-term numbers have picked up quite well. Mike, may I add one comment on the capacity? There is some temporary effect on capacity because for those products, and not all are, that are of interest to both institutional and intermediary market, what we do is when capacity is released by the asset allocators because they cannot anymore rebalance portfolio in a closed fund, we tend then to offer it to the institutional market. So after a certain time lag, part of that capacity is taken on in institutional mandate segregated portfolios. Can we just go over here and then we'll come? Yeah. Thanks. Hi, Carolyn Jarch from Deutsche Bank. Three questions, if I may. First of all, on longevity. You mentioned your institutional longevity is now 5.3 years. Can we have a comment on how that compares to the industry? Well, exactly 5.3 years over three. On an average of three years and higher than that, more like six or slightly above six, if you just take the last 12 months. We think that's pretty competitive. I think we would say the industry average has come down, and I think 5.3 to six is, I would think, quite competitive. Thank you. Turning then to your new product. I think you're saying that you've got a U.K. core RDR-ready range that's coming out. Can you give us some more details on that one, please? Massimo, would you like to pick that up? Well, we launched a couple of products that have gone out at 40 basis points total expense ratio. They are large capacity, managed in a core way with a benchmark plus one investment objective. They tend to compete in the ETF space in total expense ratio for the equity side, with a little bit of extra for the possible outperformance net of fees, and have a zero rebate possibility, so they are compliant with the new structure of the distribution pricing model as designed by RDR. Thank you. Finally, just in terms of the new markets that you said you might be looking at, can you give us any more details? Well, I would say I do not want to go into specific details, but we think there are more opportunities in developing markets. We already have, as you know, I think quite a significant competitive advantage in terms of our presence in developing markets, doing local to local business, raising funds to invest globally from developing markets and investing in developing markets from Europe and the U.S. and so on. So it is a big part of our total business. If you just look at our global emerging market equities business, it is about $23 billion. Our emerging market debt business and so on, our Asian equities business, Asian fixed income business. This is a very big part of our business. It has been a strategic thrust for us for many years. I think there are more opportunities to invest and develop businesses in those developing markets, and that is particularly where we are focused. Yeah. Nitin Arora from HSBC. Couple of questions. Firstly, on the institutional demand, I was a bit surprised by your comment on the declining demand in the institutional side because as you have highlighted, one of the main product categories you have been focusing on is LDI, which I would have thought should be more resilient particularly in these times. So, if you could spell a bit more on that. Also, is it the case that the demand from institutional and the product suite which you have, there is a mismatch within that or something more to that? Secondly, on the intermediary side, you say the demand in U.K. has been relatively stable or picking up. Europe has been improving. What do you think is holding back the Asian investors? Well, let me pick up the first point and, Massimo, perhaps you would like to talk about Asian retail. I do not want to get this institutional slowdown out of context or exaggerated. As I say, we have a good pipeline, positive pipeline of business we won, which will be funded, has not yet been funded. We are still looking at a lot of opportunities in institutional. All I am saying is, if you look at the gross flows in the fourth quarter, the reason the fourth quarter turned negative was for two reasons. One, we had a GBP 1.1 billion, just big single client outflow, which we knew was coming for a time, and this was a strategic decision on their part to manage that money in-house in future. Our performance was fine. It was nothing to do with that. It is just a desire to bring that back in-house. But secondly, there was a slowdown in gross sales in the fourth quarter. And we've had, as you know, extraordinary success in institutional in 2009, 2010, and 2011. I still think we're looking at positive flows. We're just saying that just a slightly lower level of activity than what we were seeing a year ago. And I put it down to markets and what's happened. Institutional's been very resilient in terms of the uncertain market conditions for a long time compared to intermediary. Now I think, not surprisingly, we're seeing a little bit of a slowdown, but I wouldn't want to get it out of perspective. And in terms of products, we have a lot of competitive products that are in demand in institutional space, and particularly with some of the new ones we're bringing on, which we talked about. So I don't have concerns about that. So I wouldn't want you to get that out of perspective. We're just suggesting that, in the short term at least, there's been just a little bit of a slowdown in activity. Massimo, do you want to pick up the Asian retail part? Well, on Asian retail, it's country specific rather than regional. So for example, in Indonesia where we have a 26% market share, they issued a new tax rule that has been disadvantaging position in public funds. And so all the market has been very negative in January and early February when the new transparency and declaration rule was introduced. In Singapore, the market is positive as it is in Australia. In Japan, there are new regulatory aspects that relate to the decumulation products that have slowed down the IPOs from the large brokerage powerhouses in a very significant way, and that will take two or three more months before you see the new wave of product launches. Hong Kong and Taiwan, my impression is that is more related to risk being still off the table, rather than Schroders or regulatory aspects. In Korea, it has been more a company issue as well as a market issue because as we remember, we come from a history of very high concentration of product and channels in a very limited number of products and very high market share in a few channels. So I think it's overall temporary, but it's very different one country from the other. Thanks. Scott Jenkins, Credit Suisse. Just in terms of the net inflows that you've seen year to date, has that been really driven by a reduction in the redemption cycle or have you actually started to see gross sales coming back? I think both, basically. We've seen both. We've seen a pickup in sales and a reduction in outflows. Okay. Just one more question. Just on the new funds that you've launched, the RDR-ready funds, do you see much cannibalization there in terms of your existing funds and what are your views on RDR and potential impact on the active fund management fees? Well, we won't see much until RDR come into effect because these products, as well as we launched new share classes for every single product in the U.K. that are similar to the institutional share class we already have in Europe, specifically designed for asset allocator without commission going forward. For all these, we can see the results, say, in 2014, 2015. So it's a bit early and nothing much will happen in 2012. Having said that, we do not expect cannibalization because while we've been moving our product range in the high alpha and outcome-oriented total return or high income space, so these are the three spaces where we've been step by step and we are continuing to move our product range year after year. These products have been launched in the space we occupied in the past, that is the core space, and they tend more to be an experimental competition to ETFs than a competition to our existing high alpha end products. Thank you. Morning. Bruce Hamilton, Morgan Stanley. Just a couple of questions. Firstly, on the comp to revenue, I think you said 45% long-term target, which is what you said before. Were you implying that 2012 should be no worse than that, i.e., up sort of 1%? Because I think in the past you said it could be a slightly bigger jump on the investments. It could be higher. It depends on the recruitment of talent and it obviously depends on market levels. I think I'd be surprised if it isn't one percentage point higher. I think we'll have to give you guidance as the year goes on as to how it's looking. Perfect. It's a decision we make. We obviously accrue at a certain rate. But the principal decision we make at the end of the year in the light of performance and talent recruitment and revenues and so on. It's quite hard to predict now, but I think that we always believe that if there is a short-term uptick, if it's justified by the long-term growth opportunity, then it's something we're quite happy to take. Then just on products, obviously multi-asset's been hugely successful. My understanding of that's substantially institutional, but could you give me a sense of how much of that book is intermediary, if any? Then finally, just on the sort of year-to-date flows, has there been any real change in the dynamic or is it sort of multi-asset income globally? Is it all the same sort of themes in terms of where you've seen a pickup or is there any kind of change in dynamic? The multi-asset last year, I think I said it was GBP 2.9 billion of net inflows in institutional and it was GBP 1 billion of net inflows in retail or intermediary and GBP 7 billion of our intermediary book is in multi-asset and GBP 27 billion in institutional. Massimo, do you want to pick up the second question? Yeah. At the beginning of the year, I would say that there is a broad balance among all the different products and there isn't a specific theme that would dominate the other. Okay. Well, thank you very much for joining us.