Group Chief Executive Officer’s Report
The 2016 financial year represented another year of double digit growth for the Group and is particularly pleasing given the more difficult trading conditions over the past 12 months.
The business has continued to perform strongly and in many respects the 2016 outcome represents a watershed year as it demonstrates how the strategy of diversifying our business across regions, investment strategies and distribution channels has been an important factor in the ability to deliver uninterrupted growth.
As we look back on 2016 there were a number of headwinds across the industry which we navigated very well. Markets were not as favourable to us this year compared to previous years. In fiscal 2016 global markets in local currency terms on average were 4 percent lower, the first average negative return since fiscal 2012. We also witnessed the continued rise in passive investment as well as investors’ concerns over global growth and geopolitical risks, resulting in the industry experiencing net outflows from equity funds. I will comment further on these global trends shortly. Despite these headwinds I am pleased to report continued growth in funds under management (FUM) and profitability. FUM grew by $5.6 billion, to $84.0 billion on the back of another strong year in net inflows of $4.4 billion.
Cash NPAT, our measure of profitability, was up 18 percent on last year. This translated into Cash EPS of 50.8 cents, a 15 percent increase on last year and total dividends to shareholders of 42 cents per share, an increase of 14 percent.
Base fee revenue was up 8 percent driven by higher FUM and margin expansion. Performance fees were up 49 percent on last year. Operating expenses were also up 11 percent largely due to our business model which links reward to revenue as well as ongoing investment in distribution, investment teams and higher regulatory costs as our business expands globally.
- higher revenue margins
- strong support from institutional clients in the form of inflows
- continued flows into US pooled vehicles
- strong flows into our fixed income strategies
Investment performance over the long term remains strong, notwithstanding some softer short term performance this year. As in previous years, our investment managers have provided a brief summary of their investment strategies starting on page 20. I encourage you to take time to review this section of the annual report which outlines our approach to managing client portfolios and perspectives going forward.
Net inflows of $4.4 billion this Financial Year has been particularly pleasing. This has been mostly raised through the institutional channel which saw net inflows of $3.6 billion. The wholesale channel, being fund flows from financial advisers, mostly through platforms as well as from high net worth and private client businesses was positive $2.0 billion. Outflows of $1.2 billion were primarily driven by the attrition in the legacy book. The products that generated the most in net inflows during the year were global and emerging market equities, as well as our fixed income strategies.
This demonstrates the resilience of our business and the importance of diversification. Over the past five years net inflows have varied between ‑$0.6 billion in 2012 to a high of $5.7 billion in 2015. This includes flows from different channels and across investment strategies in varying market environments. During that period the majority of our net inflows have come from the wholesale channel, with the exception of this fiscal year. The 2016 Financial Year represented a negative year on average for global markets in local currency terms and therefore having the institutional book (albeit at lower margins) provides resilience in tougher times and a good counterbalance to the ‘retail’ investor. We have found that when markets reverse, our institutional investors tend to buy on the dip whereas the retail investor retreats.
If we look back over time we find the investment strategies that drive our flows changes with investor appetite and the contribution from different regions also varies. In 2012 and 2013, flows were predominantly into our global, UK and emerging market portfolios. In 2014 and 2015 demand for global equities continued, but we saw a resurgence of interest for European equities and growing interest in our fixed income strategies. In addition, our investment in the US was starting to pay off with increasing flows from that part of the world.
The key change in 2016 has been the strong growth in our institutional book and continued positive flows from the US, with support predominantly for global equities and fixed income. In contrast we saw a slowdown in the OEICs (UK and Europe) with geopolitical concerns around Europe following the UK referendum to exit the European Union.
Throughout this whole period markets faced a number of factors both positive and negative but importantly our growth momentum has continued uninterrupted. I attribute this to the growing diversity of our book of business which will continue to serve us well going forward.
As I look back on 2016, whilst our financial results were strong, it was quite a difficult year for markets and the industry. As I mentioned earlier, in local currency terms, markets had their worst year since 2012 with investors retreating, margins continuing to come under pressure and passive funds continuing to take a growing share of flows. With the exception of how market levels directly impact our revenue we have managed to buck the trend by ‘sticking to our knitting’.
Our strategic focus remains unchanged in building out
a global asset management business...
Globally, investor flows in 2016 slowed dramatically. Total global flows (across all asset classes except cash) for the 12 months ending June 2016 were $185 billion, whereas in 2015 total global flows were $1,224 billion. With the benefit of hindsight the period between 2012 and 2015 represented a period of strong flows for the industry. Coming out of the debt crisis of 2011, which represented a low year in terms of global net flows, investors over the ensuing four years through to mid‑June 2016 generated strong net positive flows. Albeit many were forced to take on more risk through the need to earn an income stream by accessing dividend yields as a negative interest rate policy was pursued by a number of central banks around the globe. This also had the effect of pushing up asset prices, in turn creating confidence and generating more flows. We were beneficiaries of these flows as we expanded our product range and distribution reach geographically into the US and Europe.
The December quarter of 2015, the start of our 2016 Financial Year, marked a stark change in global flows with a significant decline in net flows across the industry triggered by a re‑assessment of China’s growth outlook following a devaluation of the Chinese Yuan currency. Commodity prices fell and “risky” assets such as equities declined. Pressure on markets was added to with a quarter percentage point rise in official US interest rates. Global flows declined and whilst remaining positive have not recovered to the levels seen in previous years.
For the 12 month period ending June 2016, investors around the globe withdrew $65 billion from equity strategies compared with net inflows of $234 billion the previous year. Yet despite these headwinds, net flows across our equity book were sustained with net positive flows of $2.4 billion which demonstrates the strength of our investment teams and strong distribution efforts.
This has been particularly the case for our European and US investors where our European investment strategies had net positive flows of GBP86 million and the US pooled funds with positive flows of USD1.2 billion. This diversity of investment strategies and broader distribution across geographies meant we were able to better weather the tougher market conditions. Diversification of asset classes also helped in a year where investors are more cautious, with our fixed income business delivering $1.3 billion in net new flows.
Continued growth in FUM is good for the business but sustaining strong investment performance is critical to retaining assets, future growth and maintaining the confidence of clients. An important ingredient of sustaining long term investment performance is the courage to limit the capacity of investment strategies as asset growth can reach a point where it becomes an impediment to generating above market returns.
This year we ‘soft‑closed’ a further two investment strategies bringing the total number of strategies that are now ‘soft‑closed’ to five as of September 2016. In a world where margins are under pressure and passive strategies a threat, ensuring our assets under management do not grow to a size that limits our ability to continue to deliver investment performance is key to protecting both margins and market share. We also find that allowing our portfolio managers the ability to manage their capacity is a positive when attracting investment talent to the business.
…through continuing to attract and retain investment talent and utilising our distribution channels to market our expertise to clients across different geographies.
The preservation of investment performance is becoming increasingly important as the trend to passive style investments continues. An increased focus on costs in a low return world, increased regulation, ease of access and what has been a tougher environment for active managers as low interest rates have played havoc with asset prices, has seen a renewed interest in passive investments. Behind this trend there is the increasing opportunity to differentiate on investment performance, given the greater likelihood of mispricing of assets over the long term, as securities are priced on the weight of money as opposed to fundamentals, which provides opportunities for active managers to exploit. This is predicated on the ability of our business to retain and attract the best talent, a core part of our business strategy.
We are in continuous dialogue with individuals who either we identify or approach us to join the business. Our due diligence in these discussions is extensive as we do not compromise on investment excellence. We must be comfortable that any new strategies we launch, through the addition of new teams or individuals, complements our existing strategies, we have confidence in the portfolio managers’ abilities to deliver investment performance and there is a strong cultural fit.
A new addition to the team in 2016, was the establishment of a global equities team based in Sydney. This team will broaden our global equities capability and will be focused on gaining market share in the Australian retail market. This is a growing segment in Australia, but one in which we have not actively participated. The new team is led by Ashley Pittard who joins us with over 19 years’ experience in global equity markets. It will take time to build this franchise and we will be patient, as we are with all our new investment strategies, with the knowledge that once investment performance is generated we have a distribution network to further grow our FUM.
It is important that we continue to invest in the business, particularly in investment talent to foster future growth. We have been successful in building new strategies internally and this year, like previous years, we have seen net new monies invested into strategies that we have organically built. Since 2011 we have raised net new FUM of $10.3 billion into new products, generating annualised revenue of $55 million.
The business has experienced significant growth yet our management structure remained unchanged despite the increasing demands of a broader and bigger business. As investment managers ourselves we recognise the importance of prudently managing growth and there are numerous examples of companies who have not done this well. Critical to continuing to grow is ensuring we do not lose sight of the success to date whilst continuing to look for growth opportunities. This needs to be done in a manner where our investment teams remain focused on managing client monies and continue to receive strong support.
For this reason we expanded the senior management team and established the Global Executive Committee. We have made two new senior appointments, who will sit on the Global Executive Committee, being Michael Bargholz as Chief Executive Officer, BTIM (Australia) and Ken Lambden as Chief Executive Officer, JOHCM Group. Gavin Rochussen, who has led the successful growth of the JOHCM Group, takes on a new role as Group Executive, International to focus on driving BTIM’s growth strategy in international markets. Completing the Global Executive Committee is Cameron Williamson as Group Chief Financial Officer and the addition of a Group Chief Risk Officer who we are in the process of recruiting.
This structure provides for continued focus on international growth with strong local leadership and increased management bandwidth to execute on the strategy.
We are very fortunate to have been able to attract such an experienced and high calibre talent and I very much look forward to working with them as a team.
Our strategic focus remains unchanged in building out a global asset management business. The strategy which is outlined in the Strategic Report (pages 8 and 9) is centred on continuing to attract and retain investment talent and utilising our distribution channels to market our expertise to clients across different geographies. More specifically, we remain focused on building out our US business by diversifying our product offering and launching new strategies. Across the UK and Europe the focus will be on expanding our reach in markets where we see further opportunity such as southern Europe. We remain committed to servicing our clients in Europe and will navigate our way through the Brexit outcomes by putting in place the jurisdictional structures necessary to satisfy any new arrangements. The UK government has confirmed that it intends to trigger Article 50 by the end of March 2017 thereby starting, the formal process of leaving the EU which will need to be in place two years later.
When looking at investment teams, we continue to look for opportunities in global equities and we are conscious of the growing demand for income in a low interest rate environment which combined with an aging population will lead to a growing number of retirees in search of income streams. We are also aware that equity markets are well supported by historically low interest rates with equity multiples at historically high levels in some areas, so we remain mindful of where we are in the cycle.
In Australia, we are seeing an improved flow environment for the business as a result of building out new products, growth in our fixed income capabilities and success in broadening our distribution channels. This focus remains, as well as continuing to service our largest client in BT Financial Group in providing investment solutions for their clients.
As mentioned earlier in my report, an important part of building on the success to date is building out the leadership and management team to support the execution of our strategy. I very much look forward to working with the team in continuing to build‑out a successful global investment management business that our shareholders and staff can be proud of.
In what has been another successful year, I take this opportunity to thank all our people across the Group for their dedication and hard work. We are a people business and without the talent and quality of our staff these outcomes for shareholders would not be possible.