Polar Capital Holdings plc

I'm Gavin Rochester, Chief Executive of Polar Capital. I, alongside our Chief Finance Officer, Chief Investment Officer, and the Global Head of Distribution will present an overview of our annual results to the 31st of March, 2024. It has been another challenging period for active equity managers, with widespread outflows reported by many of our peers. Polar Capital has not been immune to this. And across the financial year, we have also seen net outflows. However, in Q1 of 24, we witnessed net inflows into our range, the first quarter of net inflow in eight, and this trend has continued into Q2. Having passed its five-year anniversary during the reporting period, our Emerging Markets Stars Fund has seen strong inflows with the team receiving over £400 million into their range of funds. Unsurprisingly, given the breakthrough in artificial intelligence seen last year and the resulting performance of technology stocks, we've seen renewed interest into our technology franchise, with the Artificial Intelligence Fund also seeing net inflows. Asset under management ended the financial year at £21.9 billion, an increase of 14%, and AUM has now grown further to £22.8 billion on 14 June, an 18% increase from April last year. Despite net outflows across the period and inflation increasing our cost base, our diluted earnings per share ended the year just 1% lower. With performance and investor demand having improved, we remain confident on the outlook and therefore are able to hold the full-year dividend at 46p. Markets continue to prove fascinating, with an ever-changing macroeconomic and geopolitical backdrop continuing to affect investor sentiment. For now, volatility remains subdued, inflation has abated, and interest rates look to have peaked, with central banks now easing monetary policy. Interest rates have started declining in some developed economies. After a strong recovery in Q4 of 23, equity markets continued to rise in Q1 of 24, and many are now all-time highs. The S&P 500 was up 30% in the financial period, with technology stocks in particular outperforming. The market remains narrow, with the Magnificent Seven, or Fab Five, dominating market cap indices. In Q1 of 24, gold outperformed a rising US equity market, surprising many.

The last two years have been a challenging period for the asset management industry. Following a difficult year in 2022, the fund flows rebound hoped for in 2023 failed to materialise. Investor caution remained the dominant narrative, and as a result, the European funds industry suffered a second consecutive year of net outflows. The same factors continued to drive flows in the first quarter of 2024, with investors still erring on the side of caution. The perceived safe haven of fixed income has recorded five consecutive months of inflows, while in equity and mixed assets, outflows underline investors' risk aversion, as does further strong support for money market funds.

This chart shows annualized relative performance of polar strategies since inception. That's the number on each bar. And peer group ranking, that's represented by the color. So the blues are first and second quartile versus peers. And the oranges are third quartile. And these numbers are all to the end of May. And the key message here is the consistency of outperformance versus benchmark and peers over long periods, both for polar's thematic and also regional equity strategies. All but two are ranked in the first or second quartile versus peers. One further comment, the two bars on the right for our smart energy and smart mobility strategies. Their performance is shown here against the MSCI World benchmark, but we also compared the strategies to a purer and narrower reference benchmark containing the key beneficiaries of decarbonization and electrification, and their performance is ahead of these more specialist benchmarks. showing performance versus peers over shorter time periods as well. We're seeing an improvement since this time last year with 94 percent of AUM in the first and second quartile over one year now and 91 percent above peer median over three years to the end of May. Over 99% of our AUM is ahead of peers since inception, and over 60% of AUM is also ahead of benchmark, which is a pretty solid record. Moving on to look at performance versus markets, the long-term picture is good, with more than 60% of funds and more than 80% of assets under management beating their benchmark since inception. The numbers are a little lower over three and five years, and the reason for that is that 2022 was a year in which value styles dominated, whereas a significant number of polar strategies and a high percentage of AUM are growthy, like tech and like healthcare. We now have a situation where a small number of companies account for a pretty significant proportion of market cap weighted indices. This is not unprecedented. Every era has its disruptors and its innovators. And unlike the last time this happened, at the height of the tech bull market in 1999, and 2000, the leading companies this time are hugely profitable, many of them with substantial cash reserves too. Polar's technology team remains an area of strength and expertise and is in many ways the foundation on which the business was built. And the team's really positive about the potential for AI, not just in the tech sector, but in transforming businesses outside tech too.

As highlighted by Gavin in his introduction, Polar Capital was not immune from market and industry headwinds, and in line with the wider industry, also experienced a second consecutive year of negative fund flows. However, a combination of net outflows and a fund closure were offset by market and investment performance, resulting in our AUM at the end of financial year increasing by 14% to 21.9 billion, from 19.2 billion at the end of March 2023. The average AUM for the year were unchanged at 19.6 billion. More recently, AUM has risen further to 22.8 billion as at the 14th of June 2024, aided by both market and investment performance and positive fund flows. Overall, total net outflows for the financial year were 1.7 billion, despite gross inflows of over 4 billion. Even with the late rally in equity markets into the end of 2023, half of the year's total net outflows were recorded in that quarter, primarily from four strategies and largely attributable to one or two large shareholders in each case. Encouragingly, though, we saw a marked improvement in the final quarter of the financial year as outflows slowed in January and February and turned positive in March. A total net inflow of 228 million during the final month resulted in an overall positive quarter of 56 million the first quarter in eight. This momentum has continued into the current quarter with net inflows of 196 million quarter to date to the 14th of June. During the period, we experienced selling pressure across a number of our strategies, including areas that were out of favour with investors, such as UK, European and healthcare equities and convertible bonds. While several of our strategies saw material gross inflows, in the case of global technology, global insurance and healthcare opportunities, they were not sufficient to offset the outflows, driven by a combination of profit-taking and de-risking. However, we did see positive net inflows into several of our underlying funds, including Emerging Market, Asian Stars, Artificial Intelligence, Smart Energy, European Ex-UK Income and Healthcare Blue Chip. Turning to NetFlow's calendar year to date, despite an uncertain outlook, investor activity has progressively increased in 2024, with growing interest in our strategies and in emerging markets and technology in particular. A momentum appears to be building. Even if the active equity space does not grow materially this year, these positive inflows demonstrate that there is still an opportunity for Polar Capital to grow by taking market share from others. The new business pipeline remains promising. However, redemptions are difficult to predict in the current environment and on occasion are still sizeable. Encouragingly, we are currently on track to deliver a second consecutive quarter of positive fund flows.

A stronger second half to the financial year in terms of market movements and investment performance meant average AUM for the full year at $19.6 billion was broadly unchanged from the prior year. This translates into net management fee revenues for the year of just under $154 million. Our net management fee yield over the year measured 78 basis points. The decrease is a result of a changing product mix as assets are raised in newer strategies at lower rates than our higher margin strategies such as technology. Our longer term guidance on fee margins reducing by at least one to two basis points each year remains for now. Looking at the key components of our profitability, The lower average AUM base meant core operating profits declined to 44.8 million, resulting in a core operating margin of 29%. This profit margin has remained unchanged since our interim reporting in September 2023. The strong performance posted by certain underlying funds resulted in performance-free profits for the year increasing to 9.6 million. Other income represents the profits and losses recognised on our seed portfolio, net of hedging costs, and interest income on bank balances. Tying everything together, profits before tax amounted to 54.7 million and translated into an adjusted diluted total EPS of 44p, which is a 1% decrease from last year's 44.3p. The strength of our balance sheet and confidence in the business has enabled the Board to declare a second interim dividend of 32p, which maintains the total dividend for the year at 46p. Total operating and finance costs for the year were roughly 120 million, which is a 1% decrease on last year. As the slide illustrates, the overall decrease is comprised of three main drivers. Number one, an increase in staff compensation costs, which itself was a combination of lower core profits resulting in lower totals for salaries, bonuses and core distributions being offset by higher performance fee related variable compensation costs. Number two, higher year-on-year other operating costs for the reasons flagged at the interim stage. As a reminder, this includes taking on additional office space in the existing building and extending our main lease out to 2028, as well as tactically increasing spend on marketing and client interactions with a view to defending assets and to position the business for more positive investor sentiment. It is important to note that this investment is now beginning to bear results. And finally, number three, the increased costs were offset by a reduction in exceptional costs. Exceptional costs are items that are either non-recurring or non-cash and therefore excluded in determining adjusted diluted EPS. Within this line is the annual amortization of intangibles amounting to 1.2 million this year. The total cash in seed portfolio holdings at year end demonstrate the strength of our balance sheet. Our seeding program supported seven funds at the end of the year, with the seed money and smart energy having been redeemed during the year once that fund grew to 100 million in size. The capital position for the group remains strong. The chart on the left shows how the allocation of capital across seed investments, regulatory capital, and general working capital remains broadly consistent with the prior year. The overall surplus capital of 52 million over regulatory requirements remains a healthy one. And finally, the framework applied for the use of capital remains unchanged as we look to balance returns to shareholders with investing in the business for future growth. Given the strength of our balance sheet and our confidence in the outlook for the business, the Board have announced a second interim dividend of 32p, which means the total annual dividend has been maintained at 46p.

Turning to strategy and outlook, as you may recall, our stated strategy has been growth with diversification. We remain committed to this approach. And as you can see, we have made progress to diversify our asset base, despite technology stocks continuing to rise in value. A key driver of this has been our emerging markets and Asia team, where we have seen strong client demand, particularly from the Nordic region. The team's asset center management recently surpassed £2 billion. We retain a strong pipeline of client interest, and with the emerging market strategy available globally now, we remain confident that assets will continue to grow. Polar Capital was founded by a technology investment team, and it remains a core strength of the business, with the 11 strong technology team now one of the largest tech teams in Europe. Unsurprisingly, given the breakthrough in artificial intelligence seen over the past few years, we have seen renewed interest in the team's range of funds. Six years ago, we launched a dedicated artificial intelligence fund, as the team expected AI to be a potentially transformative technology. The fund invests in both enablers of AI and global beneficiaries, meaning it provides a complementary approach to our global technology fund. Investor interest has heightened over the reporting period, and the fund has seen net inflows. Product development is a key component of our growth with diversification strategy. Since my arrival as Chief Executive, we have taken a measured and focused approach to launching new funds, while also closing subscale and uncompelling products. This year, we have already launched an emerging markets healthcare fund and a European small cap fund. In September, we welcome a new international small cap manager who joins us from Brown Capital. Dan Boston will be based in Florida, and he will be recruiting a team of analysts to support him managing a new US domiciled international small cap fund. Dan previously managed $3.5 billion in assets, and so we are optimistic that his arrival will provide a further avenue for growth and diversification. Diversification by region continues to be a focus. We have added further resource to our US sales team, with four experienced business development representatives now in place and a new office opening in Nashville, Tennessee. Assets in our US domiciled vehicles now exceed $200 million. With the launch of the International Small Company Fund later in the year, the US will continue to be a focus for the business. The Nordic region now provides an important and growing client base. We have opened an office in Stockholm to facilitate client servicing in that region. In summary, we have recently witnessed net inflows into our range and our current assets under management now exceed the average AUM of the previous year. The International Small Company Mutual Fund launched in September, provides a differentiated product for the US market, and we are optimistic that this will help further grow our assets under management. Extension strategies within existing teams provide additional commercial capacity, and we have significant remaining capacity in funds that are in demand and receiving inflows. We remain committed to ESG factors, and our investment teams are supported by a central ESG team, which we have invested in over the past few years. Our performance has continued to improve, and we are confident that our differentiated and specialist range of funds will continue to appeal to investors. With our strong balance sheet and improved outlook, we have maintained our dividend for the year. I hope you found this interesting and thank you for taking the time to watch.