Schroders plc

Good morning, everyone, and welcome to the Schroders' first half results for 2021. I'm joined today, as usual, by Richard Kears, our Chief Financial Officer. I'm afraid we're doing this remotely again. I keep saying to you that hopefully next time we'll be back at one London Wall Place. I'll say it again. Hopefully next time we'll be back at one London Wall Place. We will stick to the usual format. I'll talk briefly about the business and strategy, and Richard will then provide more detail on financials. I'll come back and talk about Outlook. And then we'll do Q&A. So turn into the overview. As you can see, we had a strong first half net income up 24 percent. Our business is growing and we're gaining operational leverage. That means we've improved our cost income ratio, which fell by three points to 67 percent. Profits were up 33 percent compared to the first half of 2020 and reached a new record of 407.5 million pounds. That's an exceptional result and I want to emphasise that almost all of this is driven by organic investments that we've made in the past. I'll give you a few examples of that later on. Assets under management, including JVs, are also up 15% on last year and we've now surpassed the £700 billion mark. Net new business was solid with £17.9 billion of inflows and we saw good client demand throughout the first half. Our basic EPS before exceptionals increased 38% to 118.5 pence. As you can see, the first half has gone well, and given the strong performance of the business, the board recommended a dividend increase of 6%, which brings the interim dividend to 37 pence. Now, obviously, one thing which is key to the success of our business is investment performance. Our investment teams ensured they repositioned themselves well as economies changed and the vaccine announcements came out. And that means that our full-year performance numbers improved even further. One year, 87% of our assets outperformed. Over three years, it's 75%. And over five years, it's 82%. That's an excellent result, but I'm pleased that in those areas where performance is really important to net sales, like equities and fixed income, we delivered particularly strongly for clients. The numbers are these. In equities, we delivered outperformance of 84% in funds over one year, 75% over three years and 84% over five years. And in fixed income, the numbers are particularly strong. 97% of assets outperformed over one year and 96% over both three and five years. Over the short term, we'll certainly see fluctuations, but the long-term numbers are looking strong. Turning to assets, I've already mentioned that AUM growth, but it's good to see where it's come from on this chart. And I'm particularly pleased we've been able to grow the assets we manage on behalf of clients to over £700 billion, which is up 6% on last year. And our AUM in JVs and Associates was up 11%, which reached £98 billion. Turning to net new business, starting with our Asia-Pacific business. It delivered strong flows of 7.3 billion, which was driven by solid flows in both Hong Kong and Singapore, but also our JVs in Asia were very strong contributors. In continental Europe, flows were positive across every jurisdiction, particularly strong in Italy, Switzerland and Germany. Total flows in continental Europe were 5.3 billion pounds of net new business. We continue to invest heavily in sustainability in Europe, and we've repositioned our product set to make the right changes ahead of the SFDR regulation, and that should really help our competitive position. In North America, we saw positive flows from both the US and Canada, totalling £4.6 billion. The US, the Hartford range sold very well. And we also saw small net inflows from our joint venture with A10. Now, I told you a few years ago that we were investing organically to build our presence in Latin America. So it's particularly pleasing to see that come through. Every country in the region contributed positively. And we saw a total of one billion pounds of net new flows from the region. The UK actually had a good first half, especially in intermediary. We did suffer from the runoff of the SWIFT book, which I'll come back to in a moment. However, on a net new revenue basis, we were positive as low margin assets were replaced by higher margin mutual funds. Turning to our joint ventures and associates, both our Bank of Communications and Axis Bank joint ventures performed very strongly in the first half. Combined, their assets under management continue to grow at a compound annual growth rate of 8.4% since 2016. In China, markets regained their strength in the second quarter, which supported flows in AUM as the business has shifted more towards equity strategy. There's a lot happening in the background in China, particularly the work that we're putting in to launch our wealth management JV with Bank of Communications investments. which hopefully we will get launched this year. In India, our JV with Axis Bank is now the fastest-growing asset manager in the country and we're the largest manager of Indian equities in the country. It picked up the Asset Manager of the Year award and the Equity Manager of the Year award, which was particularly pleasing. It's remarkable how well these businesses are performing, particularly in India, given all the challenges. And I know Richard was going to talk you through the financial contribution later, but it's really great to see those coming through. Now, turning to our key business areas, I've already mentioned full year results. We saw flow momentum pick up strongly in Q4. This has continued throughout the first half of the year. So In aggregate, net flows of £17.9 billion, but excluding joint ventures, that number is still £10.5 billion. I'm going to go into more detail on each segment, but the key point I want to draw out here is the concentration of flows into higher margin areas like wealth management, private assets and mutual funds. And even within mutual funds, there's a strong bias towards equities. So if I just go into those... areas in order, starting with wealth management. There's an awful lot of momentum here. Net operating revenues were up 13% to £204 million of revenue contribution, and net operating revenues are at a new record high. Net new business came in at £1 billion, so assets up 6% at £76.3 billion. In Casanova Capital, we completed the integration of Sandair, which as you recall, creates a global family office service. We're also investing in regional expansion, which is on track. Again, we're incurring the cost of that in this period. There isn't a revenue contribution yet, but we are confident that that will follow. Within Benchmark, we recently launched the Schroder Investment Solutions, which offers IFAs a range of managed portfolio services, both with a strong track record, but also with very competitive pricing. Benchmark contributed 0.3 billion to net inflows. Now, within SPW, Shredder Personal Wealth, there's an awful lot happening. Very good to see the business turning the corner into net positive flows. You'll recall that we made a lot of changes at the end of last year under Mark Duckworth's leadership. The run rate of costs today is running 26% lower than it was at the end of last year. So net operating profits swung positive in March, which was three months ahead of our expectations. And we're seeing a good level of referrals coming through from Lloyds Banking Group. It's about 1,000 referrals a week going into that business. Now, because there's so much to talk about, rather than unpack it here, we will hold another deep dive in October, as we did with our private assets business in June. So turning to private assets, we set out some ambitious targets for you and I'm pleased to say that we are on target for that. The business is highly profitable. It contributed £157 million to net operating revenues in the first half, which was an 11% increase compared with the first half of 2020. Assets increased by over £2 billion, despite the fact that in the alternatives area, we're in small net outflow of £0.4 billion. mostly our externally managed Gaia third party fund platform. We expect Schroders Capital to generate five to eight billion pounds of net new business per annum. And year to date, we feel we're on track to deliver that. And we've also said that we expect assets under management to double by 2025. Now, in this period, our private markets business delivered net flows of £2.9 billion. Demand was particularly strong in securitised credit and private equity. And in addition to that £2.9 billion, there was a further £2.7 billion of dry powder, which was one, but which we're not yet earning a fee on, so we don't include in our assets under management figure. Now, moving on to solutions. had a solid first half, contributed over £130 million of net operating revenues, up 9% from the first half of 2020. Now, as you know, the nature of this business is lumpy, so we're focused here very much on long-term revenue growth and operational leverage. During the first half, we did see the headwind from SWIFT, as you would expect. The outflows were £0.8 billion from SWIFT, and this will be an ongoing feature given the maturity of that book. But in aggregate, assets under management was up slightly and closed the period at £194 billion. Now, moving on to the mutual fund sector, which was particularly strong, and therefore I thought it might be quite helpful just to break it out by region. In total, that was £6.4 billion of net inflows, positive across all regions. I did mention earlier that some areas are more performance sensitive, and that was certainly a key driver here, particularly in the equity area, which was a standout performer. Now, I've also talked in the past about revamping our product set, making it more thematic, putting seed capital to work, ensuring a strong range of sustainable funds. That was really helpful during the period. I mean, our thematic range was particularly strong in continental Europe, particularly Italy and Benelux. In addition, in the US, we saw strong demand from Hartford Schroders, which their assets now surpass £10.5 billion of AUM. So in total, mutual fund assets up 10% to nearly £115 billion. And finally, institutional business. In aggregate, generated a billion pounds of net inflows and the positive momentum we saw at the end of last year has continued into this year. Here, the regional picture is slightly more mixed. We saw outflows in Asia Pacific, old chestnuts of Australia and Japan, offset by inflows in institutional clients, particularly in the U.S. Now, I've talked in the past again about making that organic investment in our sales distribution effort in the US, and you've seen a regular pattern now of good, strong flows there, and I think that's a particularly pleasing reward for that organic investment. In aggregate, our institutional assets under management was up 6% to nearly £170 billion. Going into the second half, we've also got a pretty good unfunded but one pipeline. Now I'm going to hand you over to Richard and then I'll come back to talk you through the outlook. Richard.

Thank you Peter and good morning everyone. Today we are reporting a very strong set of results. They reflect the successful delivery of our strategy with good organic growth across our priority areas. Our mutual fund business has performed particularly strongly demonstrating the continued value of our core asset management business. At the same time Both our Schroders Capital and Wealth Businesses have made good progress as they provide an increasing contribution to the Group. As a result, we have been able to grow our AUM to £700 billion and to deliver pre-exceptional profit before tax of £407.5 million. That's an increase in profit of more than £100 million or 33% since H1 2020. Let me explain how we have delivered that growth. starting with the drivers behind our segmental net income, which increased to 1.3 billion. As I mentioned, our AUM increased to 700 billion, including 98 billion of assets managed by our associates and JVs. But what matters most to our revenues is average AUM. Excluding associates and JVs, our average AUM increased 17% from the same period of 2020. The increase in value of our AUM due to markets increased revenues by 118 million. That includes an FX headwind of approximately 35 million. Net new business increased net operating revenue by 30 million. That's predominantly driven by net flows in the second half of 2020 and the continued momentum we have seen in the first half of 2021. In addition, our strong investment performance has enabled us to generate 25 million of higher performance fees in carried interest compared to H1 2020, taking us to 43 million for the half year. At the start of the year, we guided to 70 million of performance fees in carried interest for the full year. As always, it's difficult to predict the final outcome. However, given the performance to date, we could see some upside to this. Let's now look at how this breaks down by business area. I'll then come back to the other key movements in net income. Our wealth management business continues to show good growth. Peter has already mentioned the 1 billion of net inflows we have seen in H1. Looking at this chart, you can see how that has contributed to strong growth in our annualised net new revenues. This is especially important given the higher longevity of our wealth clients. Together with good investment returns, the positive flow momentum increased average AUM by 16%, compared to the same period of 2020. As a result, net operating revenue increased 24 million. That was despite a 3 million reduction in net banking interest due to the low interest rate environment. The net operating revenue margin excluding performance fees was 56 basis points. This is a bit lower than we guided to due to lower initial advice fees. We expect the margin to be around the same level for the year as a whole. Moving on to the business areas within our asset management segment, starting with private assets and alternatives. Our average AUM increased 5% to £47 billion in the first half of the year, and as Peter has said, this growth was largely driven by flows in Schroeder's capital. In the half year, net operating revenue increased 11% to £157 million, including £12 million of carried interest, and £2 million of real estate transaction fees, as the real estate market opened up again. Taking account of these fees, which are an important part of this business area, our net operating revenue margin increased from 64 basis points to 67 basis points. Excluding carried interest, the margin was 61.5 basis points. As we deploy some of the 2.7 billion of dry powder that Peter mentioned earlier, we expect the full year margin to increase to 62 basis points. Next, let's look at our solutions business. Average AUM is 18% higher than H120, principally due to the significant wins we generated during the course of last year. As a result, net operating revenue has increased to 132 million. We had a net operating revenue margin of 14 basis points. That's in line with my guidance for the full year, and we expect this to remain stable for the remainder of the year. Now moving on to the more traditional business areas of mutual funds and institutional. which continue to make an important contribution to the group. Starting with mutual funds, as I mentioned earlier, our mutual fund business has performed very strongly. We ended 2020 with positive flow momentum, and as you have heard from Peter, this has continued in the first half of this year. You can see on the slide the impact of these flows to our annualised net new revenue. This has grown significantly, helping offset the ongoing margin pressures. Together with good investment returns, these flows helped to increase average AOM by 18% to 110 billion. As a result, compared to H1 2020, Mutual Fund's net operating revenue increased 72 million to 402 million. Our net operating revenue margin was 74 basis points. That's three basis points higher than the guidance I gave you at the start of the year. This is driven by the demand for our equity products together with the impact of markets on the mix of our AUM. We expect this margin to remain flat for the full year. Finally, to our institutional business. Average AUM increased to 164 billion, and net operating revenue was 284 million, up 57 million from H1 2020. This includes performance fees of 28 million. Our net operating revenue margin excluding performance fees was 31 basis points, That's half a basis point higher than my guidance. We expect the margin to remain stable for the rest of the year. Let's now return to our net income slide. As explained, private assets are an increasingly important part of our group. This asset class often requires us to co-invest alongside our clients. We also continue to deploy seed capital in the development of new products. As a consequence, returns from our balance sheet are an increasingly important component of our results. This is illustrated by the 40 million of net gains on financial instruments we have made in the first half of the year. This is up 50 million from the same period last year when we experienced short-term unrealised losses due to the depressed asset prices as a result of the pandemic. Moving on to returns from our associates and JVs. Developing our strategic partnerships is a core part of our group strategy. particularly as we continue to expand our geographic footprint. As Pete has mentioned, our associates and JVs have again delivered strong growth for the half year. AUM has increased to 98 billion and our share of profits increased 88% to 38 million. That excludes SPW, which is included within the wealth results I talked through earlier. Our partnership with Bank of Communications in China is the largest contributor, which nearly doubled its profits compared to the same period last year This was driven by the growth in AUM and an increase in revenue margins as the business continues to develop its higher margin equity products. The revenue margin across all our associates increased from 32 basis points to 42 basis points. Bringing all of this together, our segmental net income was up 245 million to 1.3 billion. Now let's turn to costs. Starting with the compensation costs, we have accrued these at 46%. As I said in March, that represents 45% on a like-for-like basis for 2020 and an additional 1% investment in the organic build-out in China, the US and UK regional wealth. As always, bonuses will be finalised later in the year based on market conditions. Non-comp costs were £265 million. That's up £17 million compared to H120, largely driven by depreciation of the IT investments we have made in recent years. To help you, and as I explained last year, a better way of understanding our non-comp costs and the operational leverage of our business is to look at them as a percentage of our average AUM excluding JVs and associates. This is approximately nine basis points compared to 10 basis points in the first half of 2020. There have been some COVID related savings mainly in relation to travel, but you should note the reduction also reflects the benefit of the increased scalability of our platform. For the full year, we expect non-compensation costs of around 545 million. Now a quick look at our capital position. As you can see, we continue to maintain a strong capital position with a capital surplus of 1.3 billion. So in summary, we generated profit before tax and exceptionals of 407.5 million. With exceptional items of 33.6 million, these are acquisition-related principally amortisation of intangible assets, and for the full year we still expect these to be around 70 million. Profit after these exceptional items was 373.9 million. The tax rate after exceptional items was 18.5%, resulting in a post-tax profit of 304.6 million. That represents an increase in our post-exceptional EPS of 37%, reflecting our progressive dividend policy we have declared an increase in the interim dividend of 2 pence per share, meaning an interim dividend per share of 37 pence. As always, we will assess the final dividend in light of the full year results. Overall, we see this is a very strong set of results. I now hand you back to Peter.

Thank you, Richard. Now, as you can see, the business is performing very nicely, and I think importantly this year, It hasn't stopped performing in mid-June. Last year, everyone seemed to disappear off. So we've actually seen good activity through to the end of July. I'm acutely aware that there is a tussle going on at the moment between the easing effects of low interest rates, lots of quantitative easing, and a historical belief that inflation was transitory. So on the one hand, we've got a worry that inflation is a bit more sticky now And on the other hand, we've got this fear that growth isn't going to come through. And I think with that tussle going on, there is a risk of some market volatility. Set against that, if I look at the strength of our investment performance, the amount of organic investments that we've got coming through, and a number of areas where we're incurring costs but not yet seeing the revenues, I am confident about the fact that long-term growth and diversification of our business does leave us pretty well placed going into the second half of the year. And obviously, going into 2022, we've got the benefits, for example, of the wealth management JV coming through with Bank of Communications. There are plenty of opportunities for future growth, and I think we're very much focused on continuing to invest the surplus profits we're making in some of those areas of growth back into long-term organic growth rate to get that virtual circle going. With that, I'll stop and move on to Q&A. If I could ask you to just speak, just name your organisation and name, that would be really helpful. Thanks ever so much. Thank you.

Yeah, remember, if you have a question, please raise your hand. The first question is from Nicholas Herman. Nicholas, please unmute yourself. State the name of the organisation. you're calling from before asking your question.

Yes, hello. It's Nicholas Herman from Citigroup. I'm going to just, I'm going to be a bit cheeky and ask four questions, if that's okay. Firstly, on wealth, it looks like the fee margin, although the overall net operating margin, excluding performance fees, has fallen, it looks like the fee component has been rising despite, as you said, lower advice. So just kind of curious, If one of that is correct. And secondly, what is driving that particular component? So the thoughts and there would have been dilutive. The second question is on compensation. Just so if I missed this, but would you be able to decide, please, how much of the increase in compensation was investment versus increased variable comp on the improved performance? The third question is on ESG. It looks like your ESG flows have been really quite strong. Could you provide an outlook on the pipeline there and what's going on there, please? And then the final question is just on your investment performance. It's incredibly strong, so kudos there. I guess I'm a little bit also surprised because I guess you are traditionally a value player, and value has been underperforming versus let's say, momentum growth strategies. So I'd be interested to understand what is driving the really strong investment performance, please. Thank you very much.

Thanks, Nicholas. I'm going to get Richard to take the first two and I'll pick up the second two. Richard, wealth fee margin?

Yeah, there's not much more to add to your question. You're quite right. There's obviously a blend going on there. The initial advice fee is slightly down from what we anticipated at the start of the year. Sander is slightly dilutive. But in a mix, it's broad, it's not far off where we thought, and it's a very narrow difference from my expectations at the start of the year. So there's no real single key driver. It's a very narrow change from what we saw, well, what we forecast in February.

Compensation?

Compensation. Again, I think... The answer is, I've always described, in February I described the comp accrual as 45% on a like-for-like basis. The extra investment really is a step change, and that's the additional 1%, and that is, as I mentioned just now, in relation to China, UK regional wealth, and into the US in improving our distribution capability. So that is the extra investment. There's always some going on, but the real step change is those three areas. We wouldn't anticipate that level of additional investment over the underlying rate in a normal year, but this year is a bit exceptional in terms of the real deployment of organic capital in those areas.

Nicholas, if I just take the ESG question, an update on the pipeline. We've obviously done a lot of work in anticipation of SFDR. Our current estimate is that about 75% of our funds in Europe will be Article 8 or 9 compliance. So that's a big number, and we think will put us in a strong competitive position. We've obviously done a lot in terms of creating a range of thematic products as well, and we saw good flows in there, global climate change being the biggest winner, but across a range of ESG fund particularly popular. And also the sustainability component, ability to win business against competitors was also strong. On investment performance, I think, look, our teams have navigated the change in markets very well. I mean, we've obviously had value doing well immediately post-vaccines and then growth doing well of late. And I'm very nervous about making predictions about whether short-term performance will be sustained. But we've seen our fixed income performance, 96%, 97% of our funds outperforming over one year and five years. So the longer-term metrics are much more important here. But I'm really pleased. And the investment we made in things like data science were very helpful when there was a lot of noise. The last 18 months, data was poor. Being able to get good reads on on unstructured data was very helpful, which I'm sure would have helped our investment performance. I should probably keep going because I know you guys have got a busy day.

Can I just add one further point to that, 46 versus 45? The reason why it's a one-year effect is clearly we anticipate strong revenue growth from those initiatives. So it will be self-funding in 22, so that additional 1% will drop away. That's an important point. That's an important point.

Could I take the next question? Next question is from Arnaud Giblet. Arnaud, please unmute yourself. State the name of your organisation before asking your question, please.

Yeah, good morning. It's Arnaud Giblet from XenBNP. I've got three questions, please. Firstly, on the private assets business, could you talk a bit about fund launches that are coming up in the coming quarters? You also indicated £2.7 billion of dry powder funding. What sort of pace of investment should we expect for that money to be put to work? Secondly, in terms of the JVs, are you seeing any further opportunities to launch further JVs? And more specifically, on the BOC one in China, I was wondering if you could take advantage of the rules to increase your ownership. Is that something we could think of? And finally, more generally, on the M&A side, I suppose we've seen quite a lot of consolidation happening amongst private asset managers now that you've got an established position there. Do you think that there are still opportunities to do some incremental bolt-ons in private assets?

Thank you. So first of all, on private asset fund launches, we've got launches coming up in securitized, in private equity, in insurance-linked securities, and a couple of debt funds raising money, just closing off junior infrastructure debt fund. So lots of activity there. And I think we gave some guidance at our last Capital Markets Day. We said between five and nine billion a year of net flows. And we think that's reflected in the pipeline of new launches we've got coming through. Nervous about giving it for any one short period, but the long-term growth rate seems clear and expecting to double assets by 2025. In terms of the use of dry powder, I haven't got the aggregate number in my head, but a number of the funds have got quite big implementation schedules for the second half of 2021. So we would expect that to run down. But equally, A number of the wins that we will get will create further dry powder into 22. But that lead and lag will be a feature of future results. But it is nice to have that dry powder building up. On JVs, Richard might want to add something here. We announced a new partnership, slightly different partnership with Lu International, which is one of the big China tech businesses outside of in China. working in Singapore, Thailand, Malaysia on digital wealth, which is a different sort of partnership, but an interesting one. Increasing our stake with Bank of Communications actually works incredibly well where it is with our 30% stake in the FMC. And we obviously have a controlling stake of the WMC, and that feels like a good balance. And we're always – we have a number of talks of other partnerships. I think it would be inappropriate to disclose them until they're further baked. Richard, do you want to add anything? No, I think you've killed it, Peter. Okay. M&A, you're absolutely right, Arno, in your observation on M&A. We've seen a lot of activity. We've also seen it at very high prices. And I have to say that our moves have been characterized by not trying to overpay, by getting good cultural fit. So, yes, we're looking. We do believe that we want to continue building out both our wealth and private assets businesses. But right now we see a much better return from doing that organically than we do from seeing it inorganically. And that won't be true of everything, but broadly speaking, with prices where they are at the moment, organic investment seems a better route to go. Thanks, Arno. I'll move on to the next question.

Next question is from Hubert Lamb. Hubert, please unmute yourself. State the name of your organization before asking your question, please.

Hi, guys. Good morning. It's Hubert Lamb from Bank of America. I've got three questions. Firstly, on finance gains and JV and associates. They were all well above expectations. How sustainable are they or have they benefited from the strong market environment in the period? And how should we think about these lines going forward? That's the first question. Secondly, on SPW, inflows were only about 100 million in the first half. Is this what you expected and how much do you expect this to improve over the next months or year? And the last question is also on SPW. Can you talk about the hiring of new advisors? Where are we today? What's the growth been and how should we expect advisor hiring to accelerate as things get back to normal?

Thanks, Hubert. I'll get Richard to take the question on financial gains. Yeah, so JVs and financial gains. On financial gains, I comment we're clearly deploying more co-investment capital, so you should anticipate stronger returns looking forward than we have enjoyed historically. On JVs, is that sustainable? Two of the key JVs we've got are Axis and Bocom, and clearly we've talked about those in some detail before. They are enjoying strong monthly AUM flows and there's a compounding effect on that and consequently the profits are growing and it's no surprise whatsoever in terms of what we've delivered in those areas and unless there's a very significant marked change in the flow environment I would expect those numbers to continue to improve this year.

I think worth bearing in mind but both the India and China markets are growing savings markets. And that makes the dynamics of getting those long-term businesses really, really important. But we are operating in a growth market, albeit with cyclical volatility around that. And they have a good market share. And particularly in China, we've got particularly strong investment performance. But we're now the largest manager of Indian equities. Our overall market share, I think, is about 6.3%. of an important growth market. So that's important looking forward.

I also highlighted in my presentation, Hubert, the very substantial increase in revenue margin from the JVs as well. Again, the quality of the business that's been written. Again, we talked about at the year end, it's the same trend. It's a very positive mix of business that's been sold.

Coming on, Hubert, on SPW inflows. The inflows turned positive about three months earlier than we expected. So the legacy book is quite an old book in terms of the age profile. So you've obviously got assets coming in and assets going out. But I think going positive, and you've seen a very strong increase in referrals into the business. So I think looking forward, we'd expect that number to keep growing. I think the other pleasing thing is that the non-referred business, so that's this business which hasn't come through referrals into Lloyds, has also started to see a good rise. And I think that is an extra leg of growth. So I'm pleased with the progress there. Hiring advisors, our academy is pretty full. I'm going to have the number wrong, but of the order of 70 advisors are in the academy and working through. So... an important growth engine for the future. Next question. Sorry, just give one advert. We will be sending you an invitation for a wealth deep dive, which obviously includes a lot of detail on SPW, which will be in October of this year. So we can unpack that in some more detail then. Sorry, next question.

Next question is from David McCann. David, please unmute yourself and state the name of your organisation before asking your question, please.

Yeah, morning. Most of my questions actually already been asked. There's only really a couple of more technical ones. Just firstly, performance fees in the first half are obviously pretty solid. Just if you had any expectations for the full year, given where you're at the moment, where they're occurring, that would be handy, even if it's just a range. And then just on the tax rate, again, it looked just a bit lower than might have been expected. Why was that? And what should we forecast in the outlook? at least for the time being until the corporation tax, I guess, changes in a couple of years. But actually, any thoughts on that?

Thanks, David. Delighted we're answering the right questions. So, Richard, go on. Performance fees.

Performance fees, as I mentioned in the presentation, we forecast at the start of the year 70 million. That's a three-year rolling average. Clearly, last year was 95 million. It's always hard to predict. clearly they're much stronger at the half year than we anticipated as i indicated there's clearly some upside potential from the 70 million but it is so dependent on yeah the next six months so it's really difficult to forecast but i would anticipate them being yeah on the right side of 70 million uh not not a reduction i think i think the other more general point a bit like richard made the point on co-invest as the nature of our business changes and and the proportion of performance fee earning assets particularly in carry assets in private markets changes that that's helpful for the long term which is why we upgraded the portion of assets performance performance fees a couple of years ago and we're seeing that validated now which is pleasing yeah so yeah as peter mentioned it we we used to forecast 50 it's improved to 70 yeah the three-year rolling average at the end of the year might be i would it's always difficult uh david in in terms of forecasting that number but upside potential not downside Tax rate? Tax rate. The tax rate pre-exceptionals is 17.5, tax rate post-exceptionals is 18.5. That sounds really low, but the one key ingredient that you need to understand is associates, we bring in our share profits post-tax. So as our associates generate strong profit growth, that has the impact of depressing that disclosed tax rate. and I would anticipate the tax rate that we have in 2022, i.e. next year, is not dissimilar to this year's. It's difficult to look out to 2023. Clearly, there is some underlying increase in the UK rate, but it is so dependent on where those revenues accrue and the future growth rates of our associate share of our profits. But I'm very confident on the 17.5% for 2021 And all things being equal with the same mix of business, 17.5% next year. Thanks, David.

Next question. Next question is from Bruce Hamilton. Bruce, please unmute yourself. State the name of your organisation before asking your question, please.

Hi, it's Bruce Hamilton from Morgan Stanley. Can you hear me? Yeah. Excellent. Yeah, most of my questions have been asked, but maybe just on the sustainability side. Pete, you mentioned quite a lot of investment ahead of SFDR and clearly trying to move, you know, or get funds classified as Article 8 or 9. How else are you sort of trying to differentiate? Because I guess most players are saying we'll try and get funds into, you know, 8 and 9. So, you know, thinking around sort of use of data and proprietary data and that sort of thing. What are the other things you're sort of pushing on? to differentiate, and should we expect that the costs, some of the costs incurred in the first half linked to sustainability fade, or is this just going to be an ongoing area of investment? Secondly, and slightly linked, and you've probably given us this, Richard, so I apologize, but you mentioned the temporary sort of 1% increase in the comp ratio linked to investments. Should that fall away by 2022, or is it slightly longer as the revenues build in some of those new areas? And then third point, finally, on the sort of outflows from the SWIFT area in solutions, that 0.8 billion, is that a sort of sensible run rate to assume? Obviously, you know, you'll get wind on the other side, but is that the sort of the natural drag on a six-monthly basis? Thank you.

Thanks, Bruce. Yeah, so I think the point on SFDR is an important one. But what I would say is that sustainability happens across the whole portfolio. And we're very focused on European mutual funds today. in this conversation. But I think there's some much bigger things going on elsewhere. You've seen Biden's executive order in the US, which is potentially a big change. A lot of Asian regulators look at this. So it impacts the institutional business and our competitive position there. A couple of things that we're doing. Measurement tools is really important. We've got our SustainX tool has won loads of awards, which is all about measurement. So as distinct from hand waving or using MSCI ratings, etc., I think measurement is going to be key. Data is going to be key. And we've had a big investment in reporting. I think impact reporting will get a bigger part. And again, if you can measure it properly, you can then report on it well. So that's a big change. Will costs fade? I don't think they will. I think this is a, you know, I've talked in the past about, you know, our industry used to be about two factors, which was risk and return. I think it's now about three factors, risk, return and impact. and being able to really be clear about that impact and be engaging with policymakers, engaging with companies, is going to become a bigger and bigger part of our industry and a huge point of competitive advantage. So I think on that one, Bruce, expect us to keep running very hard at it. But you're absolutely right in calling out data as a key leverage point. A couple of other points. You saw us take a stake in a natural capital measurement business. I think it's got the same mindset, but I think we've talked a lot about listed equities. Private markets is going to become ever more important, and thinking about nature-based solutions to climate change, I think, is going to be another item on the agenda. So, again, plenty of fast-flowing water to be investing in here. So, I've I'm sure we'll spend more time talking about sustainability at future results, but it's a big part of my time and the organisation's time at the moment. Comp ratio for 2022, I think we are saying we should expect it to fall off, but Richard, you want to?

Yeah, Bruce, absolutely. That 1% uplift is temporary. It's a 21 issue only. And I think there's no upside pressure to that additional 1%. In fact, quite the reverse. It is in a call at the moment. but clearly our net income is somewhat higher than we forecast at the start of the year. So there's some downward pressure on that additional 1%, and we're true that up, as we always do, in setting that when the bonus accrual turns into bonus payments, I think there would be some upside in terms of reduction in our cost base rather than anything.

further pressure on that 46% I think the other point to make is that you've got quite good visibility on the way in which you hire sales teams and the way the revenue build out so we've seen the impact in the US we'll see the impact with a high degree of probability in the regional wealth initiative and China we're hoping to launch the back end of this year so there's quite a lot of clarity around the revenue side which makes it easier to predict the cost side On the SWIFT number, is 0.8 billion the right number? I think it's probably a tad low. It's a mature book, but it's really hard to get good visibility on it. So I would say that on balance, we'd expect it to be probably slightly higher in the second half, but it's a guesstimate. Bruce, I hope that answers your question. Perhaps we'll go to the next question.

Remember, if you have a question, please raise your hand. The next one's from Mike Werner. Mike, please unmute yourself. State the name of your organization before asking your question, please.

Sure. It's Mike Werner from UBS. Thank you. Two quick questions, as most have been asked. Number one, on the Lloyds relationship, they have another 30 billion, which is currently being managed, I think, by Aberdeen. And you have obviously gained a large portion of the previous mandate. And I was just wondering, as we look out into early next year, when that mandate, the lockup on that mandate expires, if that's something that you expect to win a large portion of. And if so, you know, my understanding is that your solutions business is very leverageable. There's a lot of capacity there. So my understanding is that it would cost very little for you to take on that mandate. If you can confirm that, that'd be helpful. And then second, in terms of your data science, you indicated how this has been an important part of some of the performance that you've been able to rack up over the past, you know, one in three years. Is the data science team, in terms of investments, is there much in terms of incremental investment that you expect going forward? Or is this... Thank you.

Mike, thanks for your questions. First of all, on the Lloyd's monies, most of that 30 billion is actually passive money. And if I remember correctly, that is basically, I think there's 4 billion-ish of real estate funds which will flow to us. And the balance, I believe, will go to a passive manager. So And I'm not certain of the timing on the passive inflow. I think our flow is next year, if I remember correctly on that. So I'm afraid to disappoint you. It's only four of the 30, but probably rather more of the revenues. The solutions business is lumpy. We are constantly in the chase for big mandates. And you're absolutely right. That is very leverageable. And so when it comes in, it tends to come in at the same profit margin. as the rest of the group, and potentially even a bit better as that business scales up more. Your question on data science, it's really hard to attribute performance, but what we do believe is that the infrastructure is there. It's been particularly helpful, actually, on applying it to ESG thinking. I would say there's not any further incremental investment required there. Where we are making incremental investments, is on digital marketing client insights. So we've directed the science at markets, but obviously directing the science and understanding client behavior is another big piece. So you won't notice the numbers, but that's from my perspective. Getting data science in product intelligence and in client intelligence is important. Hope that answers your question, Mike. I'm not sure if there's any more questions.

Yep, another question from Gurjit Kambo. Gurjit, please unmute yourself and state the name of your organisation before asking your question, please.

Hi, yeah, it's Gurjit here from JP Morgan. Hope you can hear me. Just two questions. Firstly, on Asia, what's the momentum in Asia in terms of client demand and what are the sort of key products that clients in Asia are looking to buy from Schroders? That's the first one. And then just Just in terms of, you know, organic growth, that feels like the strategy for the business, you know, in the sort of near term. What are two or three major kind of organic growth initiatives that you're undertaking at the moment?

Thanks, Gurdjieff. On Asia. So, look, I think we saw good inflows into all Asian markets with the exception of two old chestnuts being Japan and Australia. But Japan was net new revenue positive, first of all, particularly good growth in intermediary. And Australia, we're actually seeing good development in private markets there. So overall, the theme in Asia is positive. And I think both in equities and income products and multi-asset institutional in North Asia, again, continued nicely, as has intermediary. And on organic growth initiatives, the big ones that spring to mind, and Richard's already mentioned U.S. sales. He's mentioned Casanova regional wealth. Obviously, China is a big piece. Digital, I think, is a digital wealth is a big piece. Digital marketing is a big piece. European intermediary, we think we can do more. in those markets. So I think solutions, we see more opportunities for growth there. We've got a number of private debt initiatives which are maturing as well. So we feel there's a moment here to run pretty hard at organic growth. And so we've got seven or eight different strings that we're investing very deliberately into. over and above the steady incremental investment to sort of maintain the business in the background. But those are probably the main ones, Gurdjieff.

Next question. If there's any more questions, please raise your hand. And we've got another question from Nicholas Herman. Nicholas, please unmute yourself. Restate the name of your organisation before asking your question.

Hi. Yeah. So just a follow up, please. Just a follow up on an early question regarding the amount of investment in H1. You delivered a 46 percent comp ratio in line with that guidance. I mean, is it therefore at the same time revenues presumably were a bit better? So is it fair to assume that you're, let's say, 50 percent to two thirds deployed in terms of that incremental investment for this year?

Thanks, Nicholas. Richard? Yeah, as I said, I think it is unlikely when we come to the end of the year that we're going to need the full additional 1%. So I would anticipate it being slightly lower, but difficult to predict that with certainty at the moment. So we continue to occur at 46. I don't see any upward pressure on that 46 going north. It's more likely to come down because... It's based on a larger net income number than we anticipated at the start of the year. But we're very confident in it. Let me re-emphasize, within the 45%, we have always invested organically in our business. The reason we talked about the additional 1% was those three areas were very significant organic developments because we saw real value within a relatively short period of time, and we've gone for it. Yeah.

I think Rich is right that the revenue picture has been better. And if you think about the way mutual fund flows into high margin mutual funds and private assets have spread right the way through the fourth quarter of last year, but also all the way through the first half, that gives you a pretty good following wind coming into the second half. So it's a judgment about your revenues as much as about your costs. And I think Richard's pointing out the revenue picture, which is an important part of it.

And just to re-emphasize that, the quality of the revenue that we delivered in the first half, there's a compounding benefit of the trend we saw in Q4, in October, November, December, January, February, March, April, May, June, the first three weeks of July, They all compound, and that equity mutual fund flow dynamic is really, really valuable, and it's a high-quality revenue flow. So a fair degree of confidence that the second half is subject to very significant market changes. The second half should be quite encouraging. I hope that helps, Nicholas.

Any more questions?

Yeah, if you have any further questions, please raise your hand.

Well, listen, thank you very much, everybody. I wish you all the best for a very good summer and for a very busy couple of days before that. But thanks ever so much and look forward to seeing you in person hopefully soon. Thank you. Thank you.