Good morning, everyone, and welcome to our interim results presentation. Adopting our usual format at the half year, I will cover the fund flows, hand over to Craig to run through the financials. I will then finish up on other developments and outlook. We'll follow this with a Q&A. There are also a number of my executive team and non-execs here this morning. Please do look them up over coffee at the end. The first six months. It's fair to say that we have witnessed a period of unprecedented political uncertainty in the U.K., coupled with uncertain macroeconomic environment, together with a strained trade relationship between the U.S. and China. Unsurprisingly, this is not a perfect environment for wealth management business. Despite this backdrop, I am, however, pleased to report a solid set of results, once again, demonstrating the resilience of the business.
New gross inflows for the six months were GBP 7.4 billion, some 7% lower than the first half of 2018. Encouragingly, the gross flows improved in the second quarter versus the first quarter. Let's not forget, we have seen a number of years of very strong growth. Looking back just five years ago, gross flows for the half year were GBP 3.8 billion. Over that five-year period, we have achieved compound growth of 15% per annum. Importantly, the continued strong retention of existing client funds provided for net inflow for the period of GBP 4.4 billion. That's 4.6% of opening funds under management or 9.2% on an annualized basis. This continues our consistent track record of net inflows every quarter with the period since the start of 2008 shown on the current slide.
It also continues our track record of net inflows as a percentage of opening funds under management over the same period of around 10%. A demonstration of our resilience and consistency in all market conditions. Now, we know from history that in uncertain times, face-to-face advice outperforms. Looking at industry data from the Investment Association, total retail net flows for the five months to the end of May were GBP 2.3 billion, 80% lower than the first five months of 2018. Why is this? Well, first and foremost, St. James's Place is a relationship business with some 90% of new flows coming from existing clients or introduction from clients. Our partners provide holistic financial advice, helping clients on their life journey. Clients' affairs will be structured in a tax-efficient manner, and their investments will be well diversified to suit their goals, aspirations, time horizon, and attitude to risk.
Our partners are there to assist them during more difficult times, helping them to understand and navigate uncertainty. That's the value of advice. Secondly, whilst our clients have well-diversified portfolios, should they wish to reduce the risk profile of their portfolio, then within our investment proposition, they can do this free of charge, and in most cases, free of tax. Thirdly, history tells us that certain categories of our new business remain relatively stable irrespective of market conditions or uncertainty. For instance, the use of annual tax allowances, inheritance tax planning, and consolidation of DC pension pots, the bedrock of our business. Where gross flows can be impacted is with discretionary investment of, say, a bonus, proceeds from a disposal of an asset or the sale of a business. Here we see individuals reticent to invest when uncertainty prevails. Indeed, our advisers would also be cautious in this respect.
This is nothing new. We have experienced periods of significant uncertainty before. Looking back to the financial crisis of 2008, our gross flows were down 9%, not too dissimilar to the 7% decline we've experienced in the first half of 2019. What else can we draw from our experience of 2008 and the subsequent market recovery? Well, we can be confident that those clients not investing today will invest when the uncertainty clears. You can see the strong gross flows we experienced in 2009 and '10 when stability returned to the market. Those clients would also have seen very good investment returns. Another key lesson from prior experience is not to overreact but carry on investing in the business. These investments pay off in the medium to long term. Again, going back to 2008, our gross flows for the first half were GBP 1.5 billion.
To remind you, in the last six months, they were GBP 7.4 billion, growth of some 500%. That's exactly what we've been doing, investing in the business. I'll come back to these, including the growth in the partnership, during my second outing this morning. We can draw parallels between today and our experience of 2008. However, one difference today is that stock markets have remained very resilient. Our funds under management in 2008 understandably fell. Whereas in the first six months of 2019, we continue to see our funds grow, reaching a new record of GBP 109.3 billion at the 30th of June, up 14% since the start of the year. However, it's important to note that the level of funds in the gestation period are also increasing.
Whilst these funds will generate sustained returns in the medium to long term, in the short term, our profit has been impacted by more modest gross flows relative to our planned higher costs of investment. I think this is a perfect time to hand over to Craig, to run through the financials.
Thanks, Andrew. Good morning, everyone, from me. This morning, I'm going to follow the order in which shareholder value is created. I'm going to start by commenting on our adviser growth, which is an important lead indicator. I'll then comment on our gross and net inflows for the first half of the year, together with the impact they've had on our funds under management. I'll comment on gestation, then I'll cover our cash results, and where possible, provide guidance on how we see things evolving in the second half. I'll then comment on our EEV results and capital positions. Finally, I'll comment on our interim dividend that we announced this morning. Our adviser numbers now stand at 4,096, which is 3.6% up from December, and our Academy contributed 59 new qualified advisers during that period.
Andrew, will comment further on the success we're seeing in the Academy and the enormous contribution it's now making to the business. Our gross flows for the second quarter were GBP 3.8 billion, which took total gross flows for the first half to GBP 7.4 billion. This result represents a resilient business model where the fundamentals behind our ability to grow funds under management remain very much in place even when there's political and economic uncertainty. Our retention rate for the first half has remained broadly constant at 96%, resulting in net inflows for the first half of GBP 4.4 billion.
These net inflows, together with the result of market performance, have pushed our funds under management up to a record GBP 109.3 billion, which is a 14% increase over the figure we reported at the end of December. I'll now focus on our funds in gestation, which stand at GBP 38.1 billion.
Since the Pension Freedoms changes in 2015, we've seen a marked change in our business mix in favor of pensions, and we see this as a long-term change. This means that around 60% of our new business flows into gestation. Whilst this doesn't contribute to the cash result for six years, it does represent an enormous store of value yet to emerge. The gestation balance is now of great importance when assessing future value. We've refined our disclosures, and the amounts shown in this table are a better reflection of the actual product mix, and therefore the post-tax margin embedded within the gestation balance. This has also, and will give us an opportunity to show how the total amount to emerge relates to the unwind in the cash result, which I know has been a question mark for some of you in the past.
The disclosures therefore give an improved and more accurate view on the way in which the gestation balance will roll into mature funds under management, which is the key figure for modeling the actual cash result with an income. I hope they're helpful, but we would, of course, be happy to engage on any further questions that you might have. There are some assumptions underpinning this table that haven't changed, but I should remind you of them. Firstly, the table assumes that market values at the end of June stay flat for the next six years. Secondly, we haven't modeled withdrawals, which might typically be an offset against this. Thirdly, we've assumed all new business is written at the beginning of each year rather than being spread evenly throughout.
It therefore simplifies the emergence, but serves to illustrate how our stock of gestation balances will contribute to the cash result over time. Now on to the emergence of cash itself in our cash result. Net income from funds under management is 6.2% higher at GBP 199.8 million. This figure represents actual income from mature funds under management. With this in mind, as well as being more specific on the margin on funds in gestation, we've also included information in order to understand the way in which the post-tax net income on mature funds under management is likely to evolve. The amounts reported for last year are unchanged, so these should be consistent with your models. For 2019, we expect the blended post-tax rate to be in the region of 63-65 basis points.
In terms of outlook, there is a modest increase over the next couple of years, and this is largely attributable to the planned cut in corporation tax. We've assumed the current business mix remains constant in the future, and that the flows out of gestation are as we've just explained. The margin arising on new business has reduced from GBP 70 million to GBP 61.8 million. As you'd expect, this is largely a reflection of the movement in gross flows between the two half years, you will notice that the reduction is slightly higher than you might model just using the 7% reduction in flows. There's an operational gearing point here that reverses itself in a return to growth. Establishment expenses have increased by 11%, and this is consistent with guidance given in February.
A sizable proportion of our establishment expenses are in support of future growth, and involve growing the infrastructure that will drive and accommodate this. We remain committed to growing our adviser capacity, and therefore the infrastructure needed in support. I anticipate the final outcome for the year on establishment expenses being consistent with the guidance I gave back in February. Operational development costs reflects our continuing investment in technology and other improvements in the way our business operates. This is over and above investments in Bluedoor, which I will come onto in a moment. We announced last year that we plan to invest more in our Academy, and the GBP 5 million charge reflects this investment. Andrew, is going to say more about the Academy in a moment. I have little to say about FSCS costs, which remain at a frustratingly high level.
The increase is largely due to a full year charge rather than the nine-month charge you will recall from last year. Tax relief from capital losses has returned to a more normal level for the first half. This figure is subject to tax complexity and market performance. The best way to think about the full year impact is to assume that the historic guidance remains valid, which you will recall is an annualized benefit of GBP 10 million-GBP 12 million, until the current stock of GBP 48 million is fully relieved. Miscellaneous, which for the first half stood at GBP 9.9 million, is difficult for you to model, because it includes a multitude of cash flows not covered elsewhere in the cash result presentation. Taking all of these items into account, our operating cash result was GBP 140.1 million, which is 12% lower than last year.
We've continued to invest in our business in Asia, and we remain confident that this will make a positive embedded value contribution by the end of the year. Rowan Dartington has also continued to grow, and two-thirds of its inflows now come through the SJP partnership. So far as the full year position for these investments is concerned, the guidance issued in February stands, and the net cash impact should approximate to last year's result. Taking our longer term investment activity into account, the underlying cash result was GBP 125.1 million, which is 15% lower than in the prior year. Our back office infrastructure costs were GBP 22 million. The pattern of expense in 2019, however, is very heavily weighted towards the first half because of the scale of migration activity.
You can still expect the full year charge to be similar to that which you saw last year, which again is consistent with February's guidance. Now that our U.K. business has been migrated onto Bluedoor, we're going to see these below the line costs fall away. I spoke back in February about the likelihood of decommissioning costs flowing into 2020, but these costs will be modest by comparison. The final migration of U.K. products onto Bluedoor is a huge milestone for the group, and one that Andrew is going to comment on more in a moment. I'll now turn to embedded value, where the operating profit was GBP 465.7 million, which is 5% lower than last year. There are two main moving parts within this change, which to some extent offset.
Whilst gross flows have reduced the new business margin by GBP 51 million, we've seen a positive persistency variance, which is something we've seen before where investment decisions are slowed down. This has largely driven a positive offsetting experience variance of GBP 43 million. The two other numbers I was planning to comment on. There's a positive investment return variance, which more than reverses the negative charge that we saw in December as a result of the markets. Finally, the embedded value now per share at the end of June stood at GBP 12.45. I've little to say on capital, and the position remains strong, as this slide shows. Now onto the interim dividend, which we announced this morning. The fundamentals underlying the business continue to be very strong, which means we have confidence in the outlook. Demand for quality financial advice is high.
We continue to grow the partnership, both through recruitment and the Academy. The financial results are underpinned by the future income that will be released in the next few years from gestation. The interim dividend recognized the challenges in the shorter term operating environment, but also draws confidence that we have in the prospects for the business. Thank you. Back to Andrew.
Thank you, Craig. A solid set of numbers given the external environment. I just want to reflect on the SJP business model. We are a long-term business. We build long-term relationships with our partners and clients. Having attracted 26,000 new clients in the six months, we now have over 700,000 face-to-face relationships. Our clients' needs and aspirations are long term, and they're receiving long-term holistic financial advice. We also build long-term relationships with our employees and those communities in which we live and work. Our investment management proposition is based on a philosophy of time in the market and not trying to time the market. The emergence of shareholder cash flow is structured for the long term. Furthermore, the size of the market opportunity in the U.K. is large and growing, with a 300 billion savings gap and an increasing tax burden.
There's also a growing need for advice, together with a significant intergenerational transfer of wealth in the near term. At the same time, there are not enough advisers in the U.K., resulting in an advice gap, a gap that we can only see getting bigger in the short term. Outside of the U.K., we see exciting incremental opportunities for our Asian business, and more on that later. It makes total sense to look through short-term market conditions and invest today for the creation of long-term shareholder value. Foremost is our investment in growing the size of the partnership, which, as you know, we do organically, not through acquisitions, with an objective of a steady 6%-8% increase per annum, so as not to cause the company indigestion or cultural issues.
As Craig has already mentioned, the partnership increased by 3.6% to 4,096 during the first half. This was through a combination of recruiting experienced, high-quality advisers, together with 59 individuals graduating from the Academy. There are now 518 Academy graduates in the partnership. This continues the sustained growth in the partnership over many years and provides us with confidence in our ability to both service existing clients well and attract new clients to SJP in future years. Increasing the partnership requires continued investment in the supporting infrastructure. Consequently, we have recently opened a new office in Cardiff and will shortly be consolidating the London Academy, our existing city office, and a number of corporate functions into a new office in Lombard Street. As a side, both offices have very good environmental credentials.
We continue to invest in the professional development of the partnership and take pride in the fact that last year, one in four of all new qualified Chartered Financial Planners were SJP advisers. We now have over 800 Chartered Financial Planners across the partnership. Turning now to the Academy. During the first six months of the year, there have been five intakes for the Academy and two intakes for the Next Generation Academy, attracting a combined 125 individuals. We have a further seven intakes planned for the second half of the year, which we expect to attract a further 120 to 130 to the program. There are currently 446 individuals in training across the Academy programs, with a gender split of 68% male, 32% female, and an average age of 34. This provides a strong pipeline for growth in the partnership in the years ahead.
As an aside, if after graduating, these 446 individuals were to form a standalone business unit, then in terms of number of advisers, they would have created a top 10 advice company in the U.K. With an average age of 34, they would also be by far the youngest advice company. Such is the scale of the Academy today. It has also been a good six months for growth in the SJP Asia partnership, with a net increase of 17 partners and advisers, taking the total to 150, a 13% increase since the start of the year. In addition, there is a strong pipeline of individuals that have applied to join our Asia business, boding well for future recruitment.
Gross inflows for the business were GBP 122 million in the first half, lower than the corresponding period in 2018, having also been impacted by client concerns over heightened market volatility and the U.S.-China trade rhetoric. With stock markets having recovered since the start of the year, the St. James's Place funds under management increased to GBP 800 million. Work has continued broadening the client proposition across the Asian offices with the introduction of discretionary fund management into Shanghai and regulatory approval received for a license to offer the same service in Singapore. The range of external providers of products and services has been widened in support of a greater client offering across our Asian operations. We're also investing in our discretionary investment management operation, Rowan Dartington.
Here, gross new business for the half year was 11% higher at GBP 303 million, taking the total investments introduced from the partnership to over GBP 1 billion. Total funds under management were up 17% for the six months to GBP 2.71 billion. The number of investment executives remained stable during the period and is expected to remain so in the short term as we focus on increasing the quantum of funds managed by each executive. You will be familiar with our investment in the back office infrastructure system called Bluedoor.
The first half of the year saw an intense period of activity as we come to the end of migrating all our U.K. business to the new platform. In May, we completed the migration of our older pension plans, and over the weekend of the 20th and 21st of July, we successfully migrated a GBP 22.2 billion tranche of investment bond business to the platform. All our U.K. business is now processed on a modern 21st IT platform, which provides us with the scalability to accommodate our growing business needs and greater operational resilience. It also will enable us to offer an improved service to clients going forwards. We need to complete a number of internal system changes in the second half of the year before we can decommission the legacy system. As Craig said, this will be a significant milestone for the business.
The whole project team have done a terrific job completing what has been a complex multi-year project with little disruption. The success of St. James's Place is built on establishing and maintaining long-lasting, highly personal relationships with our clients through the St. James's Place partnership. It is therefore pleasing that our clients tell us that they value our service. 89% of respondents to our biennial client survey, which accompanied the client's annual wealth account together with the new MiFID II disclosures, tell us that they were either satisfied or very satisfied with their overall relationship with St. James's Place. Encouragingly, more than 93% said they would recommend St. James's Place to others, and 54% suggested they had already done so. Furthermore, when asked to describe our proposition in terms of value for money, 96% of clients who responded said reasonable, good or excellent.
These results were on a par with previous client surveys. We've already responded to the feedback with further improvements in our service and proposition. In the first half of the year, for example, we broadened access to the Flagstone cash management service, which provides a simple and secure solution for clients wishing to hold cash savings. To date, clients have placed some GBP 700 million with this facility. We also added new propositions relating to lifetime care plans to help clients ensure care fees can be met if a need were to arise in the future. In addition, more and more clients are expressing an interest in the important matter of how their investments are managed from a responsible investing point of view.
We continue to make good progress on our responsible investing approach and build on our integration of environmental, social, and governance factors into our fund managers' investment decision-making. It is therefore pleasing that we have recently been awarded an A+ rating in the latest United Nations Principles for Responsible Investment annual assessment. The first six months of 2019 have seen a strong performance across major investment markets, reversing the falls experienced in the final quarter of 2018. Against this backdrop, our clients have benefited from very good returns, with all our portfolios delivering strong growth. In passing, I would remind you that a considerable proportion of our funds under management are invested in non-sterling assets, which will be benefiting from the recent weaker currency.
In early June, we took the decision to move the investment management of our segregated mandate from Woodford Investment Management to a combination of RWC and Columbia Threadneedle. This was possible as the core tenet of our investment management approach is to appoint managers to manage our own funds through a sub-advisory mandate rather than investing into third-party funds. Our segregated mandate limited the investments to liquid stocks and did not allow investments in unquoted stocks. Consequently, our clients continue to have full access to their investments. A good client outcome. I'm also pleased to report that St. James's Place has once again received numerous awards. A particular highlight was being voted the City of London 2019 Wealth Management Company of the Year. We have now received this award seven out of the last eight years, and I would like to thank our clients who voted for us.
I am also delighted that Ian Gascoigne received an individual award as Best Wealth Adviser Personality of the Year. There's a joke in here somewhere. Seriously, Ian, congratulations, and well-deserved. He didn't know I was going to be doing that. Before turning to outlook, a few words on yesterday's FCA papers on pensions, including one proposing a ban on contingent charging for defined benefit transfers. Although this is a small part of our business where we have remained cautious, we will nonetheless be analyzing the detail of the consultation paper and responding in due course. The FCA themselves reconfirm that a causal link between contingent charging and unsuitable advice is difficult to prove.
Indeed, it is important to remember that the test for suitability, which of course is the key customer protection measure, must be met regardless of how the fee is charged. For these reasons, we are concerned about the potential for unintended consequences, such as access to advice from the proposals. Let's finish now on a few words on outlook. Experience tells us that whilst inflows may be impacted from time to time by external factors that are beyond our control, our clients' financial planning requirements remain unchanged. If anything, the need for advice is more pronounced in times of uncertainty. Therefore, in the short term, as the current external environment remains uncertain, confidence towards investing may remain tempered. However, it is in times like this that the relationship between the client and the adviser are strengthened.
Looking further ahead, the fundamental financial planning requirements of individuals remain considerable, while at the same time, the availability of high-quality, professional financial advice continues to be limited. We are therefore confident that the strength, depth and quality of the growing partnership, together with the investments we are making in the business and our distinctive investment management approach, means that we remain well-placed to continue to grow our business. In addition, we have a strong balance sheet, and let's not forget there is GBP 38 billion of funds not yet contributing to the underlying cash result. These funds will increasingly do so as each cohort of funds mature over the next six years. That's it from me. Thank you for your attention. Can I ask Craig and Ian to join me for questions? We've got a few at the front here.
Is the mic on?
Yeah.
Okay. Everyone good?
[I know you sort of always give the revenue margins fee, but in the first half this year, they've dropped gross] of the funds in gestation by about two basis points. Your guidance for the full year net of gestation funds is also up to two bps lower than for last year. In the past, you've never, ever guided to lower margins at the revenue level. I'm just wondering what is driving that reduction in gross or net revenue margins. Second question is on any Woodford fallout. I know it's too early to have seen anything by the end of June, but what's been happening in your funds since the end of June?
The third question I've got is really on the dividend. You're holding the dividend unchanged, which seems sensible, but I'm just sort of wondering what sort of comfort you give on that dividend if looking forward over the rest of the year, you actually see underlying cash flow falling year-on-year.
Okay, shall I pick up the Woodford one to start with? Look, we, as you know, have a segregated portfolio. Even if clients were concerned, they can switch out of that fund into different funds. We've seen, therefore, no fallout from, to use your words, Oliver, from the Woodford position. In fact, we've received quite a few positive comments from clients that they have found themselves in a different position to perhaps some other friends of theirs. There's no fallout there.
On the dividend, do you want to say something first, Craig, and then I'll come and say something as well.
I think it was a forward-looking question. It's a tricky one to answer, of course, because we're thinking about the future. If I think about the three pillars of confidence that we have which is the demand for face-to-face advice, a proven capability of growing the partnership, and the existence of that gestation balance, they're not going to change. They are with us. I can only really go back to the uncertainty. I don't think anyone in this room is in a position to give a description of what will happen over the next six months. If anything, the emergence of certainty seems a little further away than it might have done when we stood up and had a similar conversation in February. I really wouldn't underplay the importance of those pillars of confidence that we have. I'll go further with the gestation.
Because of our business model and because of the inevitable pullback effect that has in today's cash result, we've got a store of value that will emerge that I don't think any other business has. That's incredibly important when you think about the medium to long term. That GBP 300 million will double the cash result in a six-year period.
I'll add to that, and I'm going to go back to 2008, which is probably, again, the last period of this uncertainty. We didn't need to cut the dividend in 2008. We allowed the payout ratio to increase because, as Craig says, we have that certainty of the funds coming through with gestation. We're also coming to the end of the Bluedoor project. The sort of large number sat below underlying cash is going to disappear. If not on the 31st of December, then hopefully shortly afterwards. Yeah. Do you want to do the margin as well, Craig?
Obviously, Oliver, I can't comment on your modeling, but I suppose the important thing is here we've got different wrappers and there are different tax regimes that apply to each wrapper, and it's fair to say those tax regimes are quite different. If anything, what you have, do, and will see is a movement in that mix. If we think about the fact that we now have a significant amount of pensions business, which will be a long-term change, although we're still writing a lot of investment business, that as a percentage is moving. What you'll see is this thing morphing, and one of the reasons we put the increased disclosure in is that we believe there might be a better way of trying to get to a forecast of what that cash result might do over the next couple of years.
In the past, I think what we've done has been good enough, but it's always been a little bit more than 77 or 77 or a little bit less. What the 77 has done in the past is it's kind of masked the complexity that sits beneath this. One of the things that's always struck me is that we've given a guide on the gestation figure using 77 bps because it's consistent, but that's actually underplaying the value that is yet to emerge. By the time you take all of the sort of mix of new business and the fact that that's coming into mature FUM, the message we're giving is that you see something that looks actually broadly stable at the margin on mature FUM level.
I appreciate this might involve some follow-on conversations with individuals, the information that we've always published is in the report, there's more there, and I think an easier way of getting our heads around how that will influence future results. Importantly, I made the comment that when you look at the rate, the margin that we're now applying to gestation, the figure at the bottom of that table will now be the same figure that you see as the second line in the cash result. It'll be far more intuitive, because I think at the moment, people are modeling lots of different numbers and then they all sort of come together. If I use really, really simple language, our future cash result will be, this is what we would have got if gestation wasn't a factor for the business.
This is what we didn't get because of gestation. The note will explain how that will mature, and therefore, this is what we did get, and it'll all roll through. Yes, you'll see differences, but they're not differences in headline rates, they're mixed differences.
I think that's the important point, is that it's a mix issue if you see any, and it could reverse if different things come into play. Who's got the mic? She's got a microphone, Oliver, now. It comes to you in a minute. Jon. Colm .
Thank you, Colm Kelly, UBS. Just two questions again on the margins and probably a follow-up to the last answer. I suppose one of the benefits of the old disclosure was the resilience of the 77 bps on total AUM, which gave a lot of comfort to the market. Can you just give a little color on how the new margin on the cash that are on the assets that is generating cash has progressed in the last few years? I suppose on my rough numbers, they have reduced consistently over the last three, four years. Should we be expecting that 65 bps on the assets that is generating cash to be moving down structurally in line with the increasing mix of pensions business? That's the first question. The second question is on the margin that is assumed in the cash estimate from the assets in gestation.
I think the assumption previously was always the 77 basis points on those assets. I'm just wondering, has there been any change on that assumption? They are the two questions. Thank you.
Two.
I assume that's mine, Andrew.
Yes. Sorry. Yes.
There's two aspects to that question. We've now put in a number that you should probably recognize from your own model for 2018 for the mature, the bps against mature FUM. We've given an estimate of what we think this year will be. It's very difficult to give long-term forecast, but I would see that being a stable figure over the next few years. I made the point in the presentation that if anything, that'll go up a notch because of plan changes in corporation tax. I think it's something we'll update on frequently because there are lots of moving parts, but I see that as being a stable figure. The question on the 77 bps, the short answer to the question is yes, it has changed.
It's changed because if you ring-fence the wrappers that have gone into gestation, actually it's higher than 77 bps. Therefore, what the disclosures reflect are the actual amounts that will flow from gestation, not just a sort of a modeling perspective. It's the actual cash flows. That's exactly why that table in future and at the half year, because it's simply half the amount, the cash result is half the amount to emerge, will be exactly the same figures. They are the actual amounts that are not hitting the cash result as a result of gestation.
Yeah. I suppose just to follow up again, there's always been that 77 bps assumption. It's just whether that has changed, just to get clarity.
The problem with 77 bps is that it is a very high level composite modeling assumption. The answer is, it changes every year. I've had conversations with a number of people in the room. Some years it's probably understated it. Some years, it's probably overstated it. If I look at the way the mix is likely to evolve in the future, if anything, at the moment, it overstates it. I think the problem with trying to give a rational explanation as to what's happening, we've outgrown that method of communication. Which is why I think we need to look at two component parts, which is the mature FUM and the yet-to-mature FUM. They're the two big components that I think we should be focusing on.
Okay. Thanks a lot.
To reiterate, there is no change in margin at the gross level. This is all business mix and that sort of stuff.
Do you want to just pass it forward to Jon first, because I did promise I'd go to Jon next.
Okay. Good morning. Jon Hocking for Morgan Stanley . I've got three questions, please. Firstly, on the new business margin in the cash statement. Craig, you mentioned that there was an operational leverage impact there. Can you just unpack that a little bit and explain to us what the sort of non-variable expenses are within that? Because that's, again, down more than you'd expect from the level of gross flows year-on-year. Coming back on the dividend, which Oliver asked about. I think historically you have tagged the dividend to a sort of payout ratio on the cash result. We also had a period where post-crisis, you built up a cash buffer at the holdco. Can you talk a little bit about whether those linkages actually still exist or not?
You keep talking about uncertainty with a dividend, but actually in terms of value drivers long-run, the adviser counts are up, the FUM is at an all-time record levels. The operational leverage you're seeing that's negatively impacting the numbers seems to be on the gross flows rather than on the FUM. I'm just trying to understand what the linkage is for the divvy going forward. That'd be helpful. Just finally to come back on this sort of the 77 basis points point again. Is the message here that the pensions business basically has got lower revenue yield than the rest of the business and the mix is shifting in that direction?
Okay. There's three questions there.
Shall I pick up the dividend one?
Yeah. Okay. If you want to [do the other two], but yeah.
Yeah, you do that.
The new business margin. I made the point that if you do a really simple piece of modeling and just assume that there's a 7% movement, you would come up with a new business margin that's GBP a couple of million higher than the one we're reporting. The reason for that is that each year we have to make an assessment of the sum of the allowances. It's by no means all of the allowances, but there are some things that partner practices have to commit to ahead of time. Which means that when you set allowances, it's based on that year's worth of performance. That's relevant to the following year. In years of consistent growth, you never really see that. It's a constant small benefit. When you reverse from the level we were at in 2018 to 7% down, it just highlights that small amount of gearing.
That's target related commissions or [rewards]?
No, I wouldn't describe it like that. It's a method of making sure that we pay an amount into the individual partner practices reflective of the overall deal we have on reward. There are small elements of it where you can't fix these things on a daily basis. You have to make a planning assumption that a business will grow by a certain amount. Every now and again, you find that the planning assumption doesn't quite work out, and yet these are fixed commitments that businesses have. It just rolls up. It's something you only see in the math when new business is lower than it was in the period where it was used to set some of that expense.
On the dividend, our policy remains to pay out 80% of the underlying cash. Knowing that actually there's some headroom there if we need to use that headroom to go up. This is what's happened at the half year. I think it's gone up to about 90%. Is it about 90%?
Yeah, it's over 90%.
We can carry on using that, Jon. As I said, if you go all the way back to 2008, then we carried on with the dividend.
Sorry, you got one more or not?
It was the question on the mix.
The mix. If you were to pick up our product literature, you would see that there is different pricing. Tax complexity changes that as well. If you were to look at individual components, what you're really seeing is that unit trust and ISA business, on the one hand, has a lower charge attached to it, but on the other hand, it starts hitting the cash result on day one. Interestingly, when you look at it on an embedded value basis, you're able to take the position we take, which is that this has got to be client need driven. At the other end of the spectrum, bonds are complicated because you've got different years and different tax regimes, and you've got pre-RDR and post-RDR. In a nutshell, by the time you've taken the tax regime on bonds into account, that's probably a little higher.
Then you've got pensions in the middle. What's important is when you throw all of that into the mix and you see new business coming in and gestation maturing, you get stability in that mature firm margin.
I'll just pass it straight over your shoulder. Thank you.
Come to you [in a minute], Andrew.
Hi. It's Johnny Vo from Goldman Sachs. Just a couple of questions. The first question is just, if I look at the shareholder cash position, which you show, and I look over a number of years, it's gone from a net cash position to a significantly net debt position, taking into consideration how much borrowings you've taken on. Your borrowings have gone up quite dramatically and your debt to debt plus equity is quite high by historic standards. It's also consistent with your cash flow statement, which if you remove your financing, is negative or zero. Can you tell me what's going on with that? The second question just relates to, in terms of the shareholder loans that you provide to your partners, how much of that is for assets that are internally managed versus assets that you're effectively acquiring externally?
Of the loans, how much assets are the loans effectively backing? Thanks. If you get the question. Thanks.
Shall we get those?
Yeah. You're going to have to get a question for Ian later.
[I'm very down].
You can do these ones if you want. Let's think about the whole, the sort of movements in the balance sheet and what the key drivers for that are, and also a reminder on this. In no particular order, we planned some time ago to invest an enormous amount in our back office infrastructure. That was planned, it was controlled, and what you see in terms of balance sheet evolution is the end result of that investment. An important point to make, we often talk about the end of the back office migration and everything else resulting in that figure at the bottom of the cash result no longer appearing.
Well, importantly, what it also means is that we're not putting resource, cash resource, into that project. It was always part of the plan, it's happened, but that will cease to be the case once the project is complete. There's a little bit in there about growth of partner loans. If you get into the data, there's also some complexity because we have now something like GBP 100 million worth of facility in some securitizations, 90 of which is currently held by third parties. We have 30-40, which we hold in notes. We still have the capacity, but the accounting rules require us to recognize all of this on the balance sheet. At the same time, we also choose to originate loans on the shareholder balance sheet.
At some point, it's quite possible that those will move into new facilities that we've organized. When you take all of this into account, but also remember that as a business, we are different to some other businesses in as much as we have, at the heart of the group, a life company that generates a significant amount of the profits that we generate. It's different to any other company because you only really pay one dividend a year in a life company. You go through a whole year of generating, I won't quite say the group profits, but a substantial element of group profitability and cash on the other side of it is generated during the course of the year, but you only pay the dividend in the following March or so.
There's always that stage, if you see the resources within the life company, you get a slightly different view. It's a complex mix, but I think I've given you the sort of overall.
We shouldn't see the debt going up anymore?
I think in the past, if you go back to sort of pre-Bluedoor days, if anything, our debt looked a little on the low side. I think that the debt will evolve as we choose different funding strategies for the business loans, which I know I'll have to come onto in a moment. I don't think I'd say it'll go down, but where it is at the moment is where we planned for it to be.
Do we have any questions for Ian?
Can I just answer the question that I haven't answered, which is on the business loans. The best way to think about these is that there is an asset there, and the asset is our entitlement because of the way the plumbing works. The cash flows from that partner practice.
It's basically secured on income that we know is going to happen. Unlike a third-party lender, where they're dependent upon the borrower deciding whether or not to make a loan repayment, the way it works is it comes to us and it makes the loan repayment, and then the surplus goes to the partner practice. Which is one reason why, if you look at the performance on that debt over the last number of years, there's been virtually no impairment at all. It's all for the purpose of growing the business, safeguarding the business, and it's all secured on those future cash flows.
Just the answer to the last question was, of those loans, how much assets is it backing in total assets?
I couldn't give you the number of the assets that it's backing because we don't necessarily think of it in those ways.
Okay. In better value?
We think of it more in the ways of how much of it is secured in terms of loan- to- value ratio on cash flows that we know will emerge.
Okay.
That's the important bit. What we've got to bear in mind is that it's not backed on our assets, it's backed on the future income of the partner's assets. Okay? You'd have to gross up both sides of the balance sheet if you wanted to do that, if that makes sense.
Okay.
Could you just pass over to Andrew, and then there's a few more over here.
It's Andrew Crean for Autonomous. A couple of questions. For as long as I can remember, your establishment expenses grow at 10% per annum. Yet you fund the Academy and you fund the IT outside of that. Your partnership, if you take out the Academy, is growing about 5% per annum. I don't understand why a large company like you should not get operational leverage by growing expenses at a lower rate than you're growing the number of partners you have. Why is that, when will that change so that you get positive, not negative leverage there? Secondly, you've talked for a while about publishing the consensus underlying cash EPS on the website so that Bloomberg can use it, so that the market can have a reliable figure for your consensus earnings. Are you going to deliver on that in the second half?
I think they're both yours again, Craig.
Establishment, you're quite right. There are certain elements of our cost base that we've disclosed separately, because in their own right, they've been quite significant developments and quite significant commitments of shareholders' funds. I don't think it would be right, though, to assume that once you take the Academy out of the equation, there's little else to support growth or little else going in to support growth. There's an enormous amount of activity that goes into recruiting experienced IFAs, for example. The Academy is an important part of our recruitment. It's by no means the only part of our recruitment. The bigger the numbers get, the more people we need to bring in and the more people we need working towards that objective. I'd also say that, I use the word infrastructure.
This isn't about bringing people into the SJP fold and then looking elsewhere. Every time an adviser joins the SJP fold, we have to think about how are they going to be supported, how are they going to be supervised? In some cases, how are they going to be accommodated? How are they going to be integrated? Every time those numbers grow, again, the level of activity changes. Then you have to think about the fact that we've got 2,000 plus of our own employees, most of whom would fall into the definition of professionals, and you have professional wage inflation in that mix as well. My main point there, I think, is that I wouldn't underestimate how much of the residual amount within establishment expenses goes towards growth.
I would also say that it is almost spot on in line with the guidance that we put out in February, because we made those decisions to invest even knowing that we were facing some uncertainty.
In terms of your gearing point, I'm going to try and do these numbers from memory. If we go back to 2017, business was up 27%, partnership was up 10%, establishment expenses were up 14%. You saw gearing when you're getting high levels of new business in. You see some negative gearing when, obviously, business isn't coming in as much.
It's just a straight thing. I mean, leverage of costs versus the growth in the partner numbers. Yes, sometimes the partners are selling lots and sometimes less.
Yeah.
But just bigger.
Yes.
Organizations tend to get operational leverage.
The three drivers to the establishment expenses are the number of advisers, absolutely, because as Craig says, you got to put infrastructure input, the pipe in. You've got normal inflation. I think for that, you can say professional wage inflation. Also, you've got volumes of business as well generate expenses.
Can I just make one rider point on that? I'm sorry to emphasize gestation, but it is one of the things I'm quite keen to emphasize. When you look at the cash results and you think about what it all means, I think it's really important to remember that the nature of our business model, and there's no change here, is that the expenses you see this year are actually the sort of business as usual expenses together with investment that ultimately support all of that income coming through in six years' time. Although I think I'm throwing a lot in the mix here, you can almost get a false impression by looking at establishment expenses and then looking at the GBP 199 million that flows through from the top line.
It's important to remember that the actual costs of building the partnership and supporting the partnership, doing everything else that's needed within the business, come through immediately. You have that deferment within gestation, which I think paints a different picture.
Could we bring the mic over there? I think David and Andrew, I think.
In terms of delivering on a commitment, I certainly said I would consider that, and I am still considering it. In terms of commitment, I think I am delivering on that. I think there are some real pluses, we've spoken about them, to doing this, and I am very clear about that. I also think there are some negatives as well, when it comes to stale information and what have you. We are progressing that. We are considering it. We can see the pros and the cons. At some point, we will make a final decision. I understand the sentiment behind the point.
David.
Morning, Dave McCann from Numis. Maybe this is one for Ian, actually. Obviously, Andy made a couple of comments at the end about the contingent charging thing from the FCA yesterday. If the proposals were to come in as proposed, I appreciate this is only a consultation at this stage, but if they were to come in as it suggested, do you think you could adapt your charging model to accommodate what they're proposing, i.e., move from contingent to a fixed fee type arrangement for anyone who engages on advice? What might that mean for flows going forward and the new business margins and ongoing margins that might be expected from that business? That's the first question, as I say, probably, possibly for Ian. Second question, probably not for Ian.
The miscellaneous items in the cash numbers, I mean, this obviously moves around quite a lot. Is there a number that you could kind of guide us towards in the same way you do the deferred tax number of the GBP 10 million-GBP 12 million? Is there some kind of medium, long-term average number that you would say is now a reasonable kind of baseline expectation that we could use there? Thanks.
I'll take the first one.
Please, yeah.
I think as Andy said, I think the paper only came out yesterday morning. For us, I think the issue is about suitability and quality of the advice first before the method of payment. I understand what the regulator's trying to do here, but our immediate response will be that the most important thing is the suitability of the advice and the quality of the analysis. Our concern at this stage would be unintended consequences of people pulling out of the market, because if they're going to set the kind of bar at what they think is an acceptable level of payment for the quality of that advice, you may find people moving out of the market, and therefore access to that advice being denied. That's what we mean by unintended consequences. We will be involved in the consultation.
We'll be speaking as and when, things change. Maybe we will have to adapt our charging model in that particular area of our business if our partners want to partake in that particular part of the business in relation to the amount of work that's involved to do the job properly. That's the reality of the market.
Maybe just a quick follow-up. I mean, yeah, Andy kind of suggested that it was a small part of the pensions business. I mean, could you elaborate on a more precise kind of quantum we're talking about here?
Yeah. We haven't disclosed that, and we're not proposing to disclose that this morning, same as we don't disclose how much inheritance tax business we do, et cetera. Clearly, we may need to at some point in the future.
Just on the miscellaneous item.
Miscellaneous.
Yeah. As I said earlier, miscellaneous is a pretty significant pot of debits and credits. I understand the sentiment behind the question, and I think the best answer to give will be that if you go back a number of years, that the guidance given will be that this might be a small positive, it might be a small negative. What we've seen over the years as the business has grown and what have you, is that if anything, there's been a drift into this becoming a net charge. Without lifting the lid on a huge number of individual amounts, some of which you might recognize. I suspect the best guidance I could give is model for a larger figure.
I would always want it to be contained at the kind of level we're seeing, because when it goes up above that level, I think then it's time to have a look and see if there's something else that needs to be pulled out if it's recurring. The challenge comes when it's not recurring, and you've just got other items. I think that's probably the best I can say at the moment.
By the current level, do you mean, so we had about GBP 10 million in the first half, so annualizing that to GBP 20 million or?
Yeah. I mean, if you ask me do I expect it to be another GBP 10 million in the second half, I don't. The nature of some of these things is that it's quite difficult to batten down the moving parts. But I think what I am saying is that if I hear that somebody's modeling it to be nil, because it might be a positive, it might be a negative, I think what I would say is that history tells us it's probably not going to be nil. It's probably going to be more than that. Now, whether it's seven, eight, 10, 12, that's a degree of precision that I think I'd be unwise to try and go into. I think the general gist is that you probably need to expect a higher level than perhaps people on average have done in the past.
David, do you want to pass it forward to Andrew?
Thanks. It's Andy Sinclair from BofA Merrill Lynch. Three from me, if that's okay. Firstly, just going back to the dividend, just to clarify that, would you be happy to or willing to go slightly above 100% of net cash given the outlook for the business and growth in the coming years, to drift above 100% in that short term? Secondly, just going back to the FCA publication, I'm looking at a slightly different element of it, which is the discussion of abridged advice and whether that could actually offset a lot of the discussion about contingent charging being removed. Thirdly, apologies to go back to the guidance on net margins. It feels to me that a lot of the confusion here is actually between multiple things being conflated, that we can't see the mix shift going on.
Would you be willing to give the margins product by product and giving the guidance at that level rather than actually conflating more together with both the runoff of surrender penalties, and the growth revenues, being conflated into one piece of guidance? Thanks.
Shall I pick up the dividend one first? Look, I think, yes, we would be. I've got two of my non-execs sitting at the front of me here sort of waiting to see what I say. Yes, I think we would be willing to go above 100%, depending upon where we could see that economic cycle. If business was picking up, markets were strong, you would do, absolutely. Craig, do you want to do the net margin by products again?
Yeah.
I know we talked about it.
My feeling on this is that we started with something that was, because of scale and evolution, too basic. I don't want to leap right to the other end of the spectrum. My suggestion would be that I think this will work. I think it'll help people understand what the relationship is between gestation, new business, and the margin on mature FUM. I also think the outlook on that is stable. Although I'm never one to say never, I would rather give this a chance first.
On the abridged, Ian might want to say a few words. This paper came out yesterday. We've obviously got to study it and look at it and figure out what it means. I wouldn't want to try and nail anything now. Ian, I don't know whether you.
The only thing, Andrew, that strikes me is the issue over advice, guidance, abridged advice. I think they're creating a confusion as to what process is here, and again, we'll be involved in the consultation. I think that it needs to be really clear.
Yeah.
Too many potentials for confusion, both for the client and the adviser and the business. Again, it is early to say, but my immediate reaction when I saw the term concerned me a little bit.
Understood. Thanks.
I think we've about out of time, but I'm conscious that a lot of the questions this morning have been financial questions, which I'm sure we can follow up with Craig and Hugh. I'm also conscious that we're all very much talking about the here and now. What we've got is the largest advice group of people. We've got the Academy. I just want to finish up perhaps with saying to Ian, do you just want to talk to them about.
Yeah.
The partnership?
Yeah. It was interesting. I was thinking, listening to Craig's presentation about, we talk about the value of gestation in our funds. I actually look at the partnership at the moment, and I see there's a gestation in a community of our advisers that you see when you walk around the place. For example, the average age of the partnership now is 45 and has come down from 48. I joined the business, I joined here 28 years ago, when the average age of the partnership was 48, 28 years ago. How we got it down to 45, 28 years later is quite a grappling concept. We have a generation of what I would call brighter things than we've ever had before coming into this business.
If 800, 900 of them are the kind of startup businesses, if we think about the way we approach them and the long-term value of those businesses, they themselves are a form of gestation period, but in a different part of the business. We talk about the Academy as a training school. People come out, 517 graduates performing really well for us. What we also know from all our experience is their average productivity increases with their experience post-graduation. The average age is 45. Peak age for advising is between 48 and 55. Again, productivity increases over time for that generation. I think that's kind of hidden behind the numbers, but I just thought I'd share that with you. Very confident about the vitality that we've got in the partnership at the moment.
Okay. I'm going to call it to a close there. Thank you very much for your time.
Thank you.