Schroders plc

Morning, everyone, and welcome to the Schroders 2022 annual results. I know you've had a busy few days, so hopefully we all get through this in an hour. But we're going to follow the normal format of prior years. I'm going to spend a little bit of time on strategy flows. Rich is going to take you through the detail, the financial numbers, come back to quick outlook and any Q&A that you may have. So this was a set of results that we found pleasing, robust, and primarily because of strategic progress we've made. I just want to spend a little bit of time before we get into the detail of the numbers on the reshaping of the business, because to my mind, that was the effort that we'd been making over prior years to get this dynamic of the business changing. And so if you look at the high level, now 53% of our group's earnings are from the high growth areas that we've been talking about in the past. I'll come back and unpack that in more detail. Our recurring revenues, our operating revenues, were actually up 1% last year. But the underlying that and the drivers of that were really strong fundraising in our Schroders Capital business. So we raised 17 and a half billion of new capital there. The wealth management business, the advisory businesses there grew at 6.7%. And our Schroders Solutions business, which, you know, was in a challenging market in the fourth quarter, and we'll come back and talk more about that, actually showed flat flows there on minus 0.2. And that's entering 2023 very much with the wind at its back. So from an operating level, I think we've made a lot of good progress this year, and I think that reinforcing nature of growth has come a long way. Clearly, when we had this meeting in the past, we've always talked a lot about enfranchisement and non-voting shares. That was done, concluded on a one for five rights issue. So that's all been done and put behind us. So at a high level, quite a lot of headlines for 2022 moving in the right direction. I put this chart to just try and demonstrate the nature of the change we've got in the business. You're familiar with our wealth management businesses, we'll talk more about those, but long-term sticky clients, high growth markets, where we've got really good market shares and are growing those market shares. Schroders Capital, which is now across Alternatives, but most importantly, private equity, private debt, real estate and infrastructure, a full service proposition that is benefiting significantly. Also from our position, Shredded Solutions. Shredded Solutions is a big business now. It's a 220 billion business. There are very few people able to deal with the needs of complicated clients. and is really a reference point for the most complicated things we deal with in our industry. And then our institutional mutual fund business, Australia Investment Management, which as you know, we've invested very heavily in new products, thematics, sustainability. And if you think of things like sustainability, it's driving growth in our charities business, it's driving growth in our wealth business. Our solutions business is benefiting from it. So to my mind, you can think of these as standalone entities, but you can also think of them as a bigger ecosystem where there is a self-reinforcing growth. And to my mind, the feature of 2022 was the point that that flywheel started working and that self-reinforcing growth started to come through, which is why you're seeing best in class performance fundraising in areas like wealth and capital. That transformation I was talking about, when we first talked to you about this strategy in 2016, 35% of our assets had been in these areas. We're now up to 53% of our assets. Perhaps more importantly, revenues have gone from 31% in those areas to 46%. um and clearly as we enter 2023 the organic growth rates that we've got embedded in those other areas will take that um further into the future so if i just dive into the numbers now um i talked about underlying net operating um revenues pre-performance fees up one percent i think that was um key for us to show that resilience. Operating profit, our KPI was down 14%. We'll come on and talk more about that, but a mixture of markets, low performance fees in particular, but also the changing nature of our cost base where we've done, I think, a really good job of constraining the inflationary element, but a lot of investing for growth still going on. Assets under management of £737 billion. um and then flow numbers we saw out of our main asset management businesses uh across the area 1.6 billion of outflows i'll come and break those down in more detail and the dividend per share up marginally at 21.5 pence clearly A key metric for us is investment performance. The numbers are here. The three-year KPI is at 73%. That is a really important thing for continuing to grow. The chart on the right-hand side, which is one I've talked to you in the past a lot about, which is the longevity, the stickiness of our client base. So if you look at our fundraising last year, so gross fund sales, we're actually at 4% at $128 billion. So the thing that changed last year was that we had a higher redemption rate, and it's obviously been well reported that 2022 was a tough year for the industry, lots of cyclical effects going on. But the reason why our asset base was resilient was that we were able to increase the fundraising rate by 4% to absorb the redemptions. That did have an effect on longevity, but you can see that long-term effect is still, I think that trend is still underlying intact. Just coming along and breaking now the business into the segments, and I'll talk through each of these segments in more detail, but just this is a high level AUM chart just showing the compound growth rates of the various businesses we've achieved over the six years since we put the strategy in place. At an operating level, wealth has shown a 10% revenue CAGR, Schroeder Capital, 24%, and Schroeder Solutions, 7%, because some of the bigger mandates we've taken on. And during that period, obviously, our JVs and associates profits has grown very considerably. So to my mind, what we're talking about is a transformation that not only are those underlying growth of those businesses on the left of the chart strong, But the businesses on the right of the chart have shown a good deal of resilience. And I think that's, to my mind, the thing that I wanted to really emphasize, that getting those businesses to be resilient into the future has been a big part of our investment proposition. And I think we've shown that this year. So if we could just go now into more of the detail, our institutional business, 7.3 billion, it saw some inflows in the second half of the year. Really that number, my sense is it's a slight disappointment to me because there were two big, there was one Japanese outflow, which I talked about in the first half of the year, and there was one in the US. They really account for all of that 7.3 billion, which is a frustration when you think, how much work has gone on in there. But aside from that, I think there was quite a lot of progress made, particularly in changing the trend lines we've talked about in two difficult markets in the past, which were both Japan and Australia, where we've arrested that issue. So that was progress. Mutual funds, we'll come on and talk more about, but effectively a 5.9 billion of outflows was driven in large part by the cyclicality in Europe. But over the last two years, net inflows into mutual funds, which I think against the industry background is a positive one. And I'm going to come back and talk about the rest of those segments in detail. So I'll crack into that. But from my part, 11.6 billion of flows into Schroeder's capital and Schroeder's wealth. So, first of all, the wealth management segment. And we set out an objective to deliver 5% growth in the wealth management segment. We've achieved that. We've actually achieved 6.6% in our advised businesses around the place, which we think is a really... important test of has our organic investment which we've talked about in the past delivered and you're seeing that starting to deliver we've also continued to invest in new advisors so we've further increased the number of advisors around the regions and we would expect and feel confident about our ability to continue that commitment to future growth in the past we do want to unpack this business for you in more detail so as a series a number of further capital markets days we're going to capital market events we're going to do this year the first one we're going to kick off in june uh with a deep dive into our different wealth businesses so you can get more granularity on those um a few headlines here for you um i i think showed us personal wealth usually a number of questions so let me let me address that one As you know, we have set about a transformation of this business over the last three years. It's now in steady monthly inflows. In fact, the gross inflow level, we're running at 9%. So the advisors are starting to become a lot more efficient. The conversion rate has moved up very significantly during the year to 13.2%. But to my mind the challenge we faced is the relatively old demographic of uh clients within this business so you've got about 40 of the client base right at end of life so for here there's a really good gearing for future growth because we've now hit a level of of referrals and and writing of new business, which offsets that. And I think looking forward, the business is feeling like we've turned that corner and we feel that the conversion rates, the referrals from Lloyds are all working well. Our benchmark continued to grow. It's advisor-based, the advisor firms on there. And so we've made further investments regionally within Casanova because we see there's more to go for in a market which is really where the strong are getting stronger. Schroeder's Capital. Now, I talked about the number 17 and a half billion of fundraising, so that's a 34% fundraising rate. And you can also see that the number of new clients where we've been able to cross-sell into the Schroeder's business has gone up very significantly during the course of the year. However, the 6.4 billion is below the 7 to 10 billion that we talked about at the end of last year. And the frustration now is two things. One is the dry powder which we carry into this year. Some of the deployments that were going to happen at the back end of last year have been postponed. So there's about a billion and a half or so which will be deployed early in 2023. That's the first thing. And the second is that during the GILTS crisis, we saw about 2 billion of false redemptions which went out of our business, which impacted that NMB number. So fundraising number, I think we feel very pleased with. The 6.4 was hit by some headwinds, but the underlying pattern of growth, I think, and a sense of the dry powder we take into next year, which is about 4 billion of dry powder, I think, we feel very comfortable in reiterating our target that we've set before of 7 to 10 billion of fundraising per annum. The areas where we saw growth were really across the piece. So we saw growth in Blue Orchard, we saw growth in real estate, private assets, private equity, private debt, infrastructure. And I think for me, insurance-linked securities, the breadth of that business really is now a one-stop shop and a competitive advantage against many of our peers that were able to offer that breadth. I think the second point, just to reiterate, is if you've got a strong solutions business, if you've got a strong business serving DB pension funds, there was inevitably a crossover between the impact on private markets and this business. And there has been a hiatus in that during the fourth quarter of the year. If I look forward into 2023, we definitely feel that that's behind us and the pipelines that we're seeing and the progress we're making feels confident. And I'll talk more about that in just a moment. Our solutions business. Now, the Underlying assets for solutions during the year went up. Our flows were at minus 0.2 billion. The gilts crisis was clearly the major issue that happened in the year. The outflows from our solutions business in the last six months of the year, which includes the September period and October, November, December, six and a half billion so um we finished the year with minus 0.2 billion uh in solutions but the six and a half billion outflow in the second half of the year i have to say that the first two months of the year that has been recovered so we we saw a a a sharp dip and a bounce back The river and mercantile acquisition has proved to be strategically really important. Many of you will have seen the independent research on this sector. We navigated that crisis very well indeed. And I think the opportunity to take market share in fiduciary management, LDI and OCIO into 2023 is a very good one. Joint Ventures and Associates had a challenging fourth quarter. We saw £10 billion out just in the fourth quarter, so a net flow of £6 billion for the year. But this is a business, it's a high growth, it's a cyclical business. I think it's hard to make short-term calls looking forward as to where the assets will go. Our sense is that we had a difficult period, November, December, January, but actually February's turned around and now become positive. So the key element for this is these are high-growth businesses. They're in markets which do have a degree of cyclicality, but the underlying dynamics and investment performance, particularly of our main businesses, is in good shape for the year, but disappointing in the final few months. Mutual funds and institutional, the Schroeder Investment Management piece. The challenge in the mutual fund space I've talked about was 3.7 billion out in Europe. UK was actually relatively resilient at about 1.2 billion out. And our equities book actually was relatively resilient, which also had about 1.2 billion out. So the issue really across both institutional and mutual funds was in the fixed income markets where we saw... in aggregate for the group including solutions 6.8 out but for these two segments about 8.8 billion of out 8 billion rather of outflows for those two segments and fixed income markets and as fixed income markets are finding a different level um one might hope that that demand stabilizes I don't want to make that prediction but I think that the first couple of months of the year I've definitely seen that. One highlight from my perspective is we've talked a lot in the past about Hartford. Hartford actually saw net inflows for the year. I think there are very few US asset managers that saw inflows into active funds for the year last year. They actually saw 0.5 billion of net inflow. progress there. And one final issue is China. Our WMC launched in March in the thick of Shanghai lockdown, which raised 2.3 billion for the year. And importantly, at the beginning of January, we were granted a license for a wholly owned FMC in China, which is the final piece of that jigsaw. We've now got the FMC joint venture with Bank of Communications, the wealth management, majority owned business with Bank of Communications, and now a wholly owned fund management company, which will probably begin work subject to inspections, et cetera, right at the very end of 2023. So it's been a long journey, but I feel very pleased to have got those pieces of building blocks in place. What was this time last year? We always talk about the great resignation and the real challenges on staff and maintaining staff and being able to act with real purpose and attract the right people. I put on this page just a series of things that we feel are making us an attractive place to work. And when we survey our staff, 96% of people say they're proud to work for Schroders. That makes retaining talent a good, relatively strong, but I think Glassdoor said that we were one of the best places to work in the UK and we've made a lot of progress with objective analysis of where we stand on sustainability. And we know that this is an area where being objective is really important in terms of how we will be seen over time and whether you look at surveys like Global Canopy, where we were the number one financial institution globally on deforestation, or we share action or our plan for nature, the number of proof points here gets ever stronger. And that's really important to clients because at the end of the day, proof points is what is determining the actions that they take. With that, I'm going to hand over to Richard. He'll take you back to the financials and then we'll come back for Outlook. Thank you.

Thank you, Peter. And good morning, everyone. Let me now take you through our results, which represent a robust set of numbers given the challenging environment. The performance reflects the benefits of our pivot towards high growth areas that Peter has already talked about. The performance of our wealth management and Schroeder's capital business in particular helped to offset the impact of wider market volatility. And including Schroeder's solutions, revenues from these three strategic areas of focus were up 11% and now exceed 1 billion. Given the extent of the fall in markets during the year, that's strong growth. This helped us to deliver 1% growth in net operating revenue, excluding performance-based fees, and a robust operating profit of $723 million. Let me now unpack this for you in more detail. You all know the extent of the bear markets in 2022, with falls in the mid-teens for both equities and fixed income. Clearly, this has had an impact on our business, and whilst FX movements helped to offset this by 80 million, our revenues reduced by 137 million as a result. Despite this reduction, our net operating income was up 1% year on year when you exclude performance-based fees. The revenue growth was driven by three main factors, our net new business, acquisitions, and an increase in interest margin we earn from the banks in our wealth management segment. Taking each of these in turn, it was really great to see that our net new business generated an increase in revenues of 48 million. A large part of that stemmed from wins in the first half of the year, as well as a tailwind from the previous year. As you heard from Peter, we had net outflows in Q4, although these were primarily from lower margin products. This meant that we started 2023 with a headwind of 7 million. However, I'm pleased to say that we now have a tailwind as a result of the net inflows we have since generated. Peter mentioned the acquisitions we completed in the first half of the year. These contributed 87 million of additional revenues. And due to the timing of the transactions, we still had the benefit of around 15 million to come through in our revenues in 2023. The final key driver in the growth in our net operating income was the net interest margin from banks within our wealth management business. As you know, that's a core revenue stream for us, but it's been impacted by the low interest rate environment in recent years. This increased by 26 million to 37 million following the rise in interest rates. Finally, to finish off on the aggregate view of our net operating revenue, we earned 60 million in performance fees and carried interests. That's higher than my guidance despite the market volatility. Looking forward, we're budgeting for a similar level of performance-based fees in 2023, but as always, that's difficult to predict. This took total net operating income to 2.5 billion. Now, let me show you how these movements break down between our business areas. Starting with our wealth management segment, average AUM increased by 3% to 98 billion driven by strong net new business. That's despite a 9 billion year on year fall in the value of AUM as a result of markets. Along with a higher net interest margin I just explained, this led to a 10% increase in net operating revenue, which grew to 394 million. The net operating revenue margin increased by two basis points to 40 basis points. Now breaking this down into the individual components of advised, platform and managed. Our advised business generated strong growth. Higher average AUM and the increase in net interest income drove a 12% increase in revenues to 331 million. Our net operating revenue margin was two basis points higher than my guidance, principally due to the high interest income. We expect this to increase by further two basis points in 2023 to 57 basis points. Moving on to our platform business, average AUM and revenues were broadly flat. The net operating revenue margin of 15 basis points was in line with my guidance. We expect it to stay at this level for 2023. And finally, to our managed business, average AUM increased to 20.5 billion, principally as a result of the net flows we generated in 2021. Our net operating revenue margin was 18 basis points and we expect it to remain at this level for 2023. So overall, that's a strong performance across the wealth segment. Now let's move on to the asset management segment, starting with Schroders Capital. The acquisitions of Greencoat Capital and Cairn contributed AUM of 9 billion. This together with the net new business that Peter talked about earlier, drove an increase in average AUM of 35%. the market volatility did have an impact on our performance fees and carried interest, which reduced to 19 million from 44 million. It's worth me adding that given the environment, we were conservative in the recognition of carry. Excluding these fees, our net operating revenue increased by 26%. That's good underlying growth. Going into 2023, we have a tailwind of around 25 million as a result of both 2022 net new business and the full year impact of our acquisitions. Peter mentioned the 4 billion of non-fee earning dry powder in the business. We expect around half of that to be deployed and become fee earning in 2023 with annualized revenues of around 11 million. Our net operating margin excluding performance-based fees was 61 basis points. That's a little less than my guidance, principally because we have moved our EMD book to the mutual funds and institutional business areas to better align with how we manage these businesses. We expect the margin to remain at this level in 2023. Next, our SRODA solutions business. Although the value of our AUM reduced, reflecting the movement in markets, including the impact of the GILTS crisis in the UK, this was offset by the acquisition of R&M's solutions business. As a result, our average AUM increased by 12%, driving an increase in our net operating revenue from 276 to 292 million. Excluding performance fees, our net operating revenue margin was in line with my guidance of 13 basis points. I expect this to reduce to 12 basis points for next year due to the mix of net new business, including the strong flows we have generated since the year end. With the strong start to the year and the strong order book, we expect the annualised net new revenues to revert to showing growth for H1 2023. So overall, as I mentioned earlier, we've had good growth across our strategic growth areas of wealth, Schroders Capital and Schroders Solutions. This helped us to mitigate the broader market challenges that impacted our mutual funds and institutional businesses. Both of these business areas were impacted by the fall in asset values and the risk off environment. Average AUM for our mutual funds reduced to 106 million. This translated into an 8% reduction in net operating revenue and a net operating revenue margin of 71 basis points. That's a touch higher than my margin guidance earlier in the year. It's always difficult to predict the margin due to the impact of markets on our mix. But for 2023, I would revert back to my guidance of 70 basis points. For our institutional business, net operating revenue fell by 13% to 520 million. That includes a reduction in performance fees from 79 million to 32 million. Excluding those fees, our net operating revenue margin was 34 basis points. That's two basis points higher than the guidance I provided, principally due to the transfer of the EMD book I mentioned earlier. The makeup of institutional business has changed in recent years and has become less prone to fee attrition. As a result, for 2023, I expect the margin to remain flat at 34 basis points, although, as ever, market movement could impact this. So overall, and in total across the business areas, our net operating revenues remained robust. Now moving on to the returns from our associates and JVs, which is the final component of net operating income I want to cover. The development of our partnerships remains an important part of our strategy. As you can see from the chart, we've had excellent growth from these businesses in the last five years with a CAGR of 41%, despite the market challenges of 2022. And going forward, we continue to expect good growth for the markets in which they operate. 2022 spw delivered good underlying growth with revenues increasing by three percent driven by an increase in initial fees as a result of the flows that peter mentioned earlier our share of profits from our asset management interests was broadly in line with 2021 with good growth from our indian venture with axis bank helping to offset a fall in profit from our long-standing bocom jv the latter principally due to a smaller gain on seed investments in 2021 it's worth me pointing out that we consider the underlying performance of BOCOM to have been really strong. Not only did it have the market headwinds to contend with, but it was also impacted by the China lockdowns, which were only recently lifted. So overall, that's an important contribution from these partnerships. And in 2022, their contribution to our profit after tax increased from 13% to 16%. Now moving on to our operating expenses. Reflecting our good cost discipline, we reduced compensation costs by 15 million or 1% year on year, despite the increase in headcount resulting from the acquisitions we completed. This cost discipline enabled us to maintain our compensation costs at 45% of net operating income. For 2023, as always, bonuses will be finalised at the end of the year based on market conditions. Moving on to non compensation costs. These were 631 million up from 543 million in 2021. It's useful for you to understand the drivers of this. So I have set out the key movements on this bridge. Let me take you through each of these in turn, starting with FX. As you know, around a third of our costs are non sterling. The weakening of sterling led to an increase in our costs of 19 million, although this was more than offset by the 18 million positive impact that the changes in rates have had on our revenue, which I referred to earlier. Next, on to travel and marketing costs. The ability of our people to travel and meet with clients is an important driver behind the success and future success of our business, given the global distribution footprint of our business. And fortunately, the end of travel restrictions has enabled activity to return, albeit in a disciplined way, as we remain mindful of our aggregate carbon footprint and costs. For 2022, the increased volume of travel and higher marketing activity has contributed to an increase in costs of £18 million. That said, our focus remains on managing expenses and we have embraced new technology to help people to communicate more effectively. This has helped us to limit the increase and our travel costs remain 25% below pre-COVID levels, despite the increased size of the business and significant rise in airline prices. Moving on to our investment activity. As you know, we continue to think long term and invest in the right opportunities. Our strategic acquisitions and continued expansion in China, including through our WMC, a new approved wholly owned FMC, contributed to 23 million of additional expenses. Both the acquisitions and investment in China will lead to increased revenues. Another area where we think long term is in our approach to investing the development of a flexible, scalable technology platform through our cloud migration program. We have made significant progress here and have been able to accelerate the program, completing the migration phase nine months ahead of schedule. As a result, we are already benefiting from greater cyber resilience and operational agility. This program led to an increase in costs of 15 million. but we will generate significant savings in the future. I will come back to that in a moment. Finally, on our 2022 costs, we continue to drive efficiency and cost savings wherever possible. As a result of a number of efficiency measures, the impact of inflation was limited to 14 million. That's only 2.5% of our prior year costs, despite the strong inflationary pressures. Now turning to 2023, we have a continued FX headwind of around 7 million. And again, through our cost control, we expect to limit inflation to around 5 million, which is less than 1% of our 2022 costs. We will continue to build out our presence in China with a full year of WMC operational costs and our wholly owned FMC going live later in the year. This, along with the full year impact of the acquisitions we had completed in 2022, will drive an increase around 15 million. And finally, we are entering the next phase of our cloud program, which involves further decommissioning and data optimization. One of the benefits of the cloud migration is that it has enabled us to avoid spending 100 million in server updates. And with that, we have avoided the associated depreciation of around 20 billion per annum. We have also avoided the material costs for renewing our data center leases and associated electricity maintenance costs. When you put all those factors together, they translate into a like-for-like saving of 15 million per annum, which we now expect to realize in late 2023, early 2024. Putting all of this together for your models, I would assume non-compensation costs around 660 million within operating expenses for 2023. I hope you now have a clearer picture of all the main drivers behind the movement in our operating profit year on year. Lastly, before I sum up, let me quickly update you on our capital position. As you know, we put a large part of our surplus capital to work through acquisitions. This, together with other movements, including regulatory changes, means that our surplus now stands at 655 million compared to 1.5 billion at the end of 2021. We will continue to hold a level of capital that allows organic investment and continue to target a dividend payout ratio of around 50%. In addition, we will be putting forward a whitewash resolution at the AGM, which, if approved, will provide us with additional option or share buybacks to manage our surplus capital position. Now to sum up, our operating profit for the year was 723 million, a decrease of 14% compared to the prior year. Our central costs, which reflect the cost of the PLC, were 49 million, down from 54 million in 2021. We had a net loss on financial instruments, another income of 7 million, mainly relating to the changes in the value of our seed and investment capital. That's a real improvement from the position at the half year. In a normal year, and you can see this if you look back over the past 10 years, we would expect gains from these investments to broadly offset the central costs. Our acquisition related costs increased to 86 million, reflecting the impact of the transactions that we completed in the first half of 2022. These costs include the amortization of intangible assets and expenses related to contingent consideration. For 2023, we expect these costs to increase to 95 million as the full year impact of the 2022 acquisitions comes through. These items result in a profit before tax of 587 million, Our dividend payout ratio is now based on our operating earnings per share and our effective tax rate and operating profit was 17.1%. We expect this to increase to around 20% for 2023, principally as a result of the change in the UK tax rate that comes into effect in April. This meant a basic operating earnings per share of 37.4 pence In light of these results and to reflect our progressive dividend policy, we have declared a final dividend of 15 pence per share. This provides a total dividend per share of 21.5 pence. After allowing for the change in our share structure, this represents a slight increase on the prior year and represents a payout ratio of 57%. Overall, and given the market backdrop, these results demonstrate the resilience of the business. Now back to Peter.

Thank you, Richard. I'm just going to spend a moment on outlook. I've already spoken about how the strategic focus change of the business will be an important part of the profit drivers going forward. And I think what we want to do today is to underline our confidence in the wealth growth and the private asset growth that we've talked about before. So there will inevitably be a market impact. sort of many of us will have views on what that is. I'm sure you will factor in your views on that. But I think the underlying resilience and growth dynamics of wealth solutions and trade as capital will remain strong. I think the comments I made about the year starting well, I want to just put out there, I think particularly in solutions, but also a much more stable environment and mutual funds and institutional worlds have come through. So we're confident in the business we're building. We think the strategic focus is right. The board has re-emphasized that investment for future growth is the right thing to carry on doing. And we are very willing now to take any questions you may have. Quick off the mark. Could you just state your name and your firm? Thanks.

It's Hubert Lamb from Bank of America. I've got two questions. Firstly, on solutions, Peter, I just wanted to clarify what you said about the flows coming back. Did you say that the 6.5 billion that you lost in the second half has come back this year?

Yes.

Okay. And give us the reason what's driving that.

So, look, there was a very major change in the... There's quite a lot of independent research published, but different managers responded in different ways. We were very fortunate that we didn't have to forcibly redeem anybody. Our pricing worked. We had sufficient collateral. So when the analysis was done at the end of the day. Our pipes worked incredibly well, our governance models worked incredibly well, and we had sufficient people to talk to clients through that. I think what that's going to lead to is a shift in market share over time that will both reflect our business model and the quality of the pipes that we've got. So we feel confident that there will be a net gain of market share, in effect, in a market that's changing.

Thanks. The second question is on Schroeder's Capital. Because one of the consequences potentially of the LDI situation is people looking for more liquidity. Just wondering how that changed the outlook from UK pension funds going into private assets and how that affects you.

So you're absolutely right. There was something of a fundraising hiatus in the UK DB market in Q4. and the denominator effect of people feeling overexposed to less liquid assets is going to be a feature going into 2023 and possibly even 2024. We are reiterating our overall guidance because we think we can achieve the growth elsewhere, but undoubtedly it is a headwind in the UK DB market. The converse, and we don't know whether government will finally come out on this, is whether or not there's going to be a change on solvency to which would free up more money to flow into private markets and risk assets over time. But that's still a work in progress.

Thanks. And the final question is on your surplus capital position. It's about 650, I think. I'm just wondering what your target for that is. I think historically people always think about it as close to a billion before you... larger, like more deals or buybacks? What's your target for capital before you start thinking about doing external acquisitions or buybacks?

Hubert, I wouldn't characterize it quite the way you described. What we've said is if it was in excess of a billion, we would find ways of returning that to shareholders. But anywhere between where we are now and a billion is We might have plans for M&A. We might have plans for organic investment. But within 500 to a billion, we feel very comfortable. But over a billion, we'll be looking at ways of returning that to shareholders.

We get embarrassed over a billion.

Yes, I think you've taken the questions. It's Nicholas Hammond from Citigroup. Three from me. If I could just come back. If I could just go to cost, please. I'm just as interested by your comment, I think you said 5.5 million inflation for 2023. Can we just dig into the moving parts there? I thought you were going to comment there, so please.

Yeah, there's lots of moving parts. It's obviously, there's an inflationary environment, particularly in IT costs, licence costs. Microsoft, most organizations use Microsoft. Microsoft price increase of 9% year on year. So to limit that to 1% requires a lot of other programs to mitigate the inflationary environment we're in. But the background inflation, especially in technology, is significant. But we are working really hard to mitigate that.

Okay, fine. And there are other savings as well from integration of businesses too, and how the overall investment budget is trending year on year.

In terms of the change programme, we have reduced our change appetite by 20% this year. But at the same time, costs are clearly impacted by full year of acquisitions. That's unavoidable. They're obviously part of our strategy in terms of driving revenue growth. And the rollout of those two wholly owned, one wholly owned business in China and a subsidiary in WMC is also, the full year effect of that is significant. But they are real growth businesses that will deliver real enterprise value in the future.

Thank you. And then the other two questions, one on the ESG and one on shows capital. Just curious, you talked about a strong focus on investment in the ESG. Can you comment about particular areas of investment there? I'd be quite interested if you could comment on that, please.

I think this is an area which is growing quickly. And I think if you look at the flow dynamics of the industry, getting it right is critical. So despite all the noise in 2022 about changing dynamics of the world, sustainable funds still took market share. And I think that's a really important underlying dynamic despite what's going on. From my perspective, we started by making a very significant ability in data and helping people understand their portfolios. That's the first thing. And that's a really important basis from which to manage and give regulators comfort that you're doing what you say you're doing. So the data piece was a big part of that and helping your analysts really understand what's going on. Where this goes to next is engagement. And I think we published our blueprint for engagement earlier this year. That ability to demonstrate that companies are moving along the curves that they've set out or helping companies establish the curves they've set out and being clear on the governance positions. So the ability to speak with and understand companies and then explain that back to the asset owners is a really important part of the next stage of sustainability. I would say people do tend to oversimplify this discussion. So there's a narrative which says the US doesn't do this stuff and the rest of the world does. We're seeing very significant growth in socially orientated funds in the US. So being able to slice this through an environmental lens, a social lens and a governance lens is an important part of having a a more nuanced debate with people about what people want out of their investments beyond return. Some people want impact, some people want something societal, some people want something environmental. So that's where this goes next.

And the last one, so I was conscious of time, but Controla's capital, clearly very constructive on the flow outlook. We've seen a lot of the listed alternatives, seeing much lower growth this year in a tougher environment, and at industry level, it looks like the overall commitments will be down this year. So what are the areas that you can talk about, what are the specific areas where you expect to be to find those trends to take share. And then I guess it also commented that the business will now focus on operating leverage. I guess we can repeat the question I asked at the half year, which is how much of a tailwind is that now? And then I guess for the overall asset management business. Thank you.

It's an important question. We recognise that many other people have downgraded their expectations for growth. I spoke a little bit about the full eye wheel effect and the self-reinforcing growth that you can get from being involved in other parts of the industry. I think that will help our position. We've also got the benefit of having acquired Greencoat during the course of the year, which is a helpful piece. But most critically, having the full hand of cards, private debt, private equity, real estate and infrastructure is a really important part of being able to have a holistic conversation. So you can solve someone's private assets answer as a whole and that's a relatively unusual position to be in. Does that help? Yeah. Hayley Jordan.

Thank you. It's Hayley Chan from Credit Suisse. Could I ask two quick questions, please? Could I just confirm, are you not giving any compensation costs to revenue guidance anymore? Because I didn't pick that up in the presentation, so I just wanted to check.

Hayley, I haven't done. It clearly depends on market conditions. And if I was doing it now, if you could tell me what markets are going to do, I will give you an absolute commitment. Yeah, we'll be very disciplined. But if we look back, the real proof point is 2022 was a really difficult year. We didn't increase our ratios, and we actually reduced compensation costs, notwithstanding quite a significant increase in headcount, principally due to the acquisitions we've made. So we've got a track record of being disciplined, but I don't want to look forward and tell you what revenues are going to do, which are clearly dependent on markets.

There's one more nuance to this, Hayley, is that... The crossover between non-comp and comp costs is quite complicated. What you bring in, what you put out. And I think one of the things we're doing this year is focusing more on what's the total envelope of costs and have we got things in the right place and should we be insourcing or outsourcing? So it's another thing where we're reluctant to say it's all one way because we're not entirely certain what we're going to achieve in that next change during the year. But we'll be very transparent at the end of the year.

Thank you. And the second question is about the 44% of funds that are outperforming over one year. Is that a metric that matters? Is it something that would already have been seen in the outflows you saw in mutual funds in institutional last year, or is it maybe something we might take into account for this year?

No, I think it's very much a reflection of the fact that indices are down. So where you've got, particularly in multi-asset, for example, many multi-asset funds have a CPI hurdle or an absolute return hurdle. So you get this impact that when markets are down, you've missed your straight hurdle. If you look at where we sit versus competitor funds, the picture is much better. And I think that's the first thing. And the second thing is that, yes, active managers had a bad year versus index last year. And so although that 44 percent, I don't think it does. I mean, in the short term, it doesn't feel like there's an impact on flows. Three year numbers still very strong. The five year numbers very strong. If you saw those weakening, I think that would be a bigger conversation. But I don't feel under any performance pressure at the moment relating to float.

But it's also very pleasing to see since October every month, it's been a very strong relative performance since October.

Bruce Hamilton, Morgan Stanley. Just one question from me. Obviously, significant progress in terms of the strategic pivot to the growth areas. In terms of the sort of flywheel benefits from here, are there any sort of missing ingredients or things that you still need to kind of strengthen through non-organic? And where is, or is it more a case of just, you know, accelerating that sort of virtuous circle? You mentioned a bit about private capital, but where would the other opportunities be, perhaps in private wealth bespoke solutions or other sort of portfolio delivery? But I'd be interested in that.

Yeah, that's a really good question, Bruce. Do I feel there's a big gap? No. I think we've, you know, getting those four pillars in place and getting a good sustainability and impact offering together was the priority. Getting the... That integrated into the business in a different way, I think, is the next major challenge. We've made some quite fundamental changes in how we go to market. Our industry in the past has talked about distribution. Distribution feels like something you do to electricity or water. you do to your client you send you send them something um my most great professional services firms or other industries focus much more on what the customer need is and because we're able to wrap around every element of that figuring out how you how you put that client piece in the center to accelerate the flywheel is the next piece so um If I take something like sustainability, the ability to really help clients understand the whole of their assets, and that opens up conversations about OCIA, it opens up conversations about, you know, You're solving the problem, or you need a matching asset for that, or you create wealth needs. Or if you think about post-retirement, micro-LDI being a long-term solution for individuals' retirement rather than it just being an institutional product. So I think that that development function of meeting the client needs becomes the next issue. if you like, the third generation of our industry when we start to think about people other than being the end of a distribution hose, and do you want a pink one, a red one, or a blue one? That doesn't feel the right way to go to market. Thanks, Bruce. Sorry, Mark.

Morning, it's Greg Simpson from BNP Parabellum Exam. Can I just ask about the potential ban on retrocessions or inducements in Europe? Any thoughts at this stage on how that might play out, how that might impact your business in Europe?

We're very relaxed about it. I mean, we've obviously worked very closely with distributors. We're embedded in a lot of what they do as much as a brains trust. Where Europe finally settles down, and we've been talking about this issue for 10 years, RDR turned out to be, I think, a relatively good thing for our business in the UK. We've seen the same happen in other markets. I'm relaxed about where Europe comes. I mean, the power of the banking distribution model is a really embedded part of how Europeans save.

Thanks. Are you seeing any signs of changing appetite between asset classes in a higher rate environment between equities, fixed income, multi-assets? And how do you characterize your relative fund performance by these signs? Is there a return of fixed income in a higher rate environment?

There's a massive return to demand for asset allocation conversations and the role of multi-asset, because I think last year was the first year where people were cracking, this stuff matters. So that is important. The second is I think we've seen a complete stabilisation of the fixed income. So you went through a really difficult period last year where fixed income funds were very much out of favour, some quite strong changes of assets. direction. That's definitely stabilised coming into the beginning of this year and demand for credit funds is returning quite nicely and we're seeing that come through. the core real estate space particularly in the uk i mean as a the comment that was made earlier i think it was bruce but you you but uh on demand for real estate in a post in the post db environment you know that that's clearly weak because people don't you know that but but the value added space is is alive and well so i think there's there are some nuances but the big shift is The governance and asset allocation thinking within clients is the area where they're thinking, we've got to get this right going forward. How are we going to deliver in a world of inflation and low returns is a really big issue for clients around the world. If you're a low-risk European saver, last year was a really difficult year. And that's challenging people's thinking and making them think about their business models. And that's a good thing from our perspective. Great. Thank you. Five minutes ahead of time. Thank you all very much. I look forward to seeing you either in June for our Capital Markets Day or July for the interim results. Thanks, everybody.