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.