Operating Review

In the 2016 Financial Year, BTIM Group’s FUM increased by seven percent or $5.6 billion resulting in closing FUM of $84.0 billion. This growth comprised net inflows of $4.4 billion, investment outperformance and positive market movements of $10.8 billion, offset by an unfavourable foreign currency movement of $9.6 billion on foreign denominated FUM.

FUM $BILLION 30 SEPT 2015 FLOWS MARKET/OTHER FX 30 SEPT 2016
Institutional 26.2 3.6 4.0 (2.6) 31.2
Wholesale
- Australia 5.4 0.5 0.4 - 6.3
- OEICs 22.5 (0.2) 3.5 (5.3) 20.5
- US Pooled 6.0 1.7 2.0 (1.7) 8.0
Westpac - Legacy 8.4 (1.0) 0.4 - 7.8
Westpac - Other 9.9 (0.2) 0.5 - 10.2
TOTAL FUM 78.4 4.4 10.8 (9.6) 84.0

The positive market performance over the year saw the S&P/ASX300 Index climb nine percent while the MSCI All Countries World Index (ACWI) in local currency was eight percent higher over the same period. The average levels of the S&P/ASX 300 and the MSCI ACWI, in local currency, were lower by five percent and four percent respectively. The Australian Dollar strengthened during the year versus both the US Dollar and British Pound, finishing nine percent higher and 27 percent higher respectively. The British Pound devalued significantly over the period on the back of the UK referendum to leave the European Union (Brexit).

Total net inflows for the year were $4.4 billion with positive inflows into both BTIM (Australia) and the JOHCM funds. JOHCM experienced inflows of $2.8 billion for the year driven by strong flows in the institutional channel and the US pooled funds, while the OEICs saw outflows (-$0.2 billion) as UK and European investors remained cautious following the Brexit vote.

BTIM (Australia) achieved inflows of $1.6 billion for the year with significant inflows of $2.3 billion driven through the institutional channel, $0.5 billion in the wholesale channel, while Westpac’s non-legacy channel (-$0.2 billion) and legacy book (-$1.0 billion) were in outflow.

Asset classes that attracted the most inflows over the course of the year included the Group’s equity strategies (+$2.4 billion) and income & fixed interest strategies (+$1.3 billion). Pleasingly all regional equity strategies were in positive inflow with significant contributions from global equities (+$1.0 billion) and emerging market funds (+$0.5 billion).

A further $2.0 billion in new mandates were committed to but unfunded as at 30 September 2016, including a $0.3 billion diversified income mandate, which was funded in the first week of October and a new equities mandate of $1.7 billion in the Global Opportunities strategy, which was funded in the first week of November 2016.

HIGHLIGHTS FY16 FY15 CHANGE (%)
Cash NPAT $156.0m $132.5m +18%
Statutory NPAT $142.0m $126.4m +12%
Operating revenue $493.9m $436.6m +13%
Operating expenses $297.0m $268.2m +11%
Operating profit margin 40% 39% +3%
Cash earnings per share (cents) 50.8 44.0 +15%
Dividends (cents per share) 42.0 37.0 +14%
Franking 37.1% 40.0% -7%
Average FUM $80.2b $75.2b +7%
Closing FUM $84.0b $78.4b +7%

Long term investment performance remains strong across the Group as at 30 September 2016, 88 percent of FUM with a sufficient track record outperformed respective benchmarks over three years and 95 percent outperformed over five years.

ASSET CLASS FUM 30 SEPT 2016 A$ BILLIONS % FUM OUTPERFORMED RESPECTIVE BENCHMARK AT 30 SEPT 2016 1
3 YEAR 5 YEAR
Equities
  Australian 13.0 80% 89%
  Global/International 17.7 99% 99%
  UK 10.9 95% 100%
  European 7.6 100% 100%
  Emerging Markets 3.1 100% 100%
  Asian 3.2 66% 66%
Property 1.9 100% 100%
Cash 7.4 100% 98%
Fixed Income 6.8 100% 89%
Diversified 11.7 50% 88%
Other 0.7 N/A N/A
TOTAL FUM 84.0 88% 95%
1 Fund performance is pre‑fee, pre‑tax and relative to the fund benchmark; % of FUM outperforming relates to FUM with sufficient track record only

Fund performance over one year was weaker in what has been a more difficult period for active managers.

However, a number of funds performed strongly through the year and outperformed their benchmarks over the 12 month period to 30 September 2016. These included:

  • JOHCM European Select Values Fund (+11.6%)
  • JOHCM International Select Fund (+9.4%)
  • BT Wholesale MicroCap Opportunities Fund (+8.7%)
  • JOHCM Emerging Markets Fund (+7.0%)
  • JOHCM Global Opportunities Fund (+5.3%)
  • BT Wholesale Monthly Income Plus Fund (+3.6%)
  • JOHCM UK Opportunities Fund (+2.9%)

A number of JOHCM and BTIM (Australia) funds earn performance fees for the achievement of above benchmark returns. JOHCM earns performance fees on a calendar year basis and BTIM (Australia) funds on a 30 June performance year. The 2016 Financial Year saw performance fees earned from 12 JOHCM investment strategies and three BTIM (Australia) investment strategies. Notable performance fees were generated from the following funds:

  • JOHCM European Select Values Fund
  • JOHCM Continental European Fund
  • JOHCM Asia Ex Japan Fund
  • JOHCM UK Opportunities Fund
  • BT Wholesale MicroCap Opportunities Fund

Cash NPAT for the year was $156.0 million, an increase of 18 percent on the previous year (2015: $132.5 million), while statutory NPAT increased 12 percent to $142.0 million (2015: $126.4 million). The result has been achieved due to higher average FUM driven by strong inflows, together with increased fee margins and higher performance fees. Consequently, Cash EPS increased 15 percent to 50.8 cents (2015: 44.0 cents).

Total fee revenue was $493.9 million, an increase of 13 percent on the previous year (2015: $436.6 million). The increase was driven by:

  • 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

Base management fees rose eight percent to $399.8 million (2015: $371.1 million) due to higher average FUM, which was seven percent higher than the previous year, while fee margins increased one basis point to 50 basis points. The growth in average FUM and base management fees was achieved despite a more volatile global market environment, with the average levels of the S&P/ASX 300 and the MSCI AWCI in local currency were lower by five percent and four percent respectively, compared to the 2015 Financial Year.

Performance fees for the year totalled $77.2 million, 49 percent higher than the previous year (2015: $51.9 million). The performance fees were predominantly earned in JOHCM funds which earned $73.7 million, while BTIM (Australia) funds delivered $3.5 million in performance fees for the year. The key funds earning performance fees this year were the JOHCM Continental European Fund, JOHCM European Select Values Fund and JOHCM UK Opportunities Fund.

Transaction fee revenue of $15.0 million was earned for the year representing a 33 percent increase over the prior year (2015: $11.3 million). The transaction fees represent fees earned on products which do not earn an annuity style fee and include a number of BTIM products developed for the Significant Investor Visa (SIV) market in Australia. Other fee revenue earned in the year totalled $1.9 million (2015: $2.3 million).

Total operating expenses increased by 11 percent to $297.0 million, (2015: $268.2 million) largely as a result of higher employee costs, driven by increased headcount, and higher variable costs linked to increased fee revenue, together with investment in operations to support recent and future business growth.

Employee costs of $227.6 million were 12 percent higher than last year (2015: $203.0 million), with $162.6 million of variable costs and $65.0 million of fixed costs. Fixed employee costs were 17 percent higher driven by 34 additional full time equivalent staff added to growing operations in the US, UK and Australia. Variable employee costs increased 10 percent, largely as a result of higher base fee revenue and increased performance fees.

Other operating costs were $69.4 million, compared to $65.2 million in the previous year, representing a six percent increase. The increase is attributable to the ongoing growth of the business including higher legal and regulatory costs, increased travel costs associated with expanded operations, higher marketing and distribution related costs, as well as cost increases for services sourced in US Dollars, including IT and data expenses which were adversely impacted by a weaker average Australian Dollar.

Financing costs for the year were $0.7 million, 46 percent lower than last year (FY15: $1.3 million) as a result of reduced debt levels through the year and lower interest rates. The overall operating cost to income ratio was 60 percent which compared to 61 percent in the 2015 Financial Year, while the compensation ratio of 46 percent declined slightly from 47 percent last year.

Fully diluted Cash EPS was 50.8 cents per share, 15 percent higher than last year (2015: 44.0 cents per share). During the year ordinary shares on issue increased from 292,565,311 to 307,430,721 due to the issuance of new shares as part of the Fund Linked Equity (FLE) program, the ongoing conversion of outstanding converting notes and shares issued as part of the Dividend Reinvestment Plan (DRP) which remained active throughout the year. The fully diluted share base as at 30 September 2016 was 310,557,330 comprising 307,430,721 ordinary shares and 3,126,609 outstanding converting notes. The outstanding converting notes will convert to ordinary shares on 4 November 2016.

The Directors declared a final dividend of 24.0 cents per share, bringing total dividends for the year to 42.0 cents per share, a 14 percent increase on last year’s dividends of 37.0 cents per share. The total dividends represent a payout ratio of 83 percent, which is within the Group’s payout ratio target of 80‑90 percent of Cash NPAT.

The franking level for the 2016 Financial Year dividends was 37 percent with a 40 percent franked interim dividend and 35 percent franked final dividend, reflecting the significant contribution of offshore earnings to the Group’s profit. Since BTIM does not retain excess franking credits, franking levels in future years will continue to be determined by the relative profits of BTIM (Australia) and JOHCM businesses. For the 2017 Financial Year, franking levels are anticipated to be in the 30-35 percent range.

The Board has maintained the use of the DRP, which was initially activated in the 2013 Financial Year. The DRP has been used to assist in the capital management of the Group including the repayment of external borrowings and funding the ongoing operations of the business. Shares under the DRP are issued at a zero discount and allow shareholders to reinvest dividends to purchase BTIM shares free of commission or brokerage costs.

BTIM actively manages its operational and strategic capital requirements using a combination of appropriate earnings retention, debt and at times, new equity issuance.

During the year BTIM retired its £45 million ($76 million) revolving loan facility with the Westpac Group and as at 30 September 2016 did not have any borrowings drawn or undrawn. Subsequent to year-end, BTIM has entered into a new three year AUD$25 million multi-currency revolving loan facility with the Westpac Group. The facility is based in Australia and is to be used to finance strategic capital requirements for the BTIM Group. The financial covenants attached to the facility include maintaining a minimum of $35 billion in FUM, interest coverage ratio of at least 10 times and a borrowing to earnings before interest depreciation and amortisation (EBITDA) ratio of no more than 2.5 times. These covenants are consistent with the expired facility.

Included on the Group Balance sheet at 30 September 2016 were intangible assets of $541.5 million consisting of goodwill and management rights associated with the acquisition of JOHCM and goodwill relating to the original purchase of BT Financial Group and Rothschild Australia Asset Management by Westpac in 2002. There was no impairment to the carrying value of goodwill during the year. The management rights associated with the acquisition of JOHCM continue to be amortised over time.

In the 2015 Financial Year, BTIM announced the first issuance of equity as part of the FLE program, a remuneration scheme for certain JOHCM fund managers. During the 2016 Financial Year, BTIM issued 8,525,752 ordinary shares to satisfy equity rights by fund managers under the FLE scheme.

For the 2017 Financial Year, there is additional equity that is required to be issued under the FLE scheme in January 2017 and May 2017. While the exact number of shares to be issued can not be determined at this time, the share issuances would equate to a total of 4.3 million shares, based on a valuation as at 30 September 2016. The number of shares to be issued remains subject to a number of variables until this time including market movements, fund flows, foreign exchange and the BTIM share price.

The FLE program is designed to be broadly Cash EPS neutral due to a reduction in revenue share the fund managers subsequently receive, which has a positive contribution to BTIM earnings provided FUM is maintained post share issuance. Full details of the FLE scheme and the share issuance are set out on pages 53 and 54 in the remuneration section of this report.

BTIM earns revenue and incurs expenses in a number of different currencies with its primary currencies being the British Pound (GBP), US Dollar (USD) and Australian Dollar (AUD). JOHCM’s operating results are denominated in British Pounds and for consolidation purposes, these results are converted to Australian Dollars at the prevailing exchange rate each month throughout the Financial Year.

During the year, BTIM did not enter into any arrangements to hedge the currency and therefore the Group’s profitability has been subject to variability via foreign exchange movements.

Over the course of the year the average AUD/GBP exchange rate was 0.5131, which was broadly in line with the average level last year (2015: 0.5110). The AUD/ GBP rate fluctuated between 0.4615 and 0.5958 throughout the year and the spot rate at 30 September 2016 was 0.5878. The significant strengthening of the AUD/GBP rate was largely impacted by the Brexit referendum in June 2016, after the UK electorate chose to exit the European Union.

The average level of the AUD/USD exchange rate through the 2016 Financial Year was 0.7368 and was six percent lower than the previous year (2015:0.7866). The spot AUD/USD rate as at 30 September 2016 was 0.7630.

BTIM uses Cash NPAT as its headline result in its financial reporting to reflect the underlying profitability of the business. Cash NPAT comprises Statutory NPAT adjusted for certain non-cash items, including the amortisation of employee equity grants less after-tax cash costs of ongoing equity grants in respect of the current year; together with the after-tax amortisation and impairment of intangibles and fair value adjustments for equity settled converting notes issued at the time of the JOHCM acquisition. A reconciliation of Statutory NPAT to Cash NPAT is set out below.

RECONCILIATION OF STATUTORY NPAT TO CASH NPAT FY16 FY15
Statutory NPAT 142.0 126.4
  Add back: amortisation of employee equity grants 58.1 41.3
  Add back: amortisation and impairment of intangibles 9.9 8.4
  Deduct: cash costs of employee equity grants payable during the year (49.3) (45.5)
  Add/ (deduct): tax effect (4.7) 1.9
CASH NPAT 156.0 132.5

1.1 Risk management principles

The Group is committed to ensuring it maintains a robust risk management framework providing oversight, internal control assurance and the advancement of a strong risk management culture within the Group.

The Board has identified the following key business risks for the 2016 Financial Year:

KEY RISK RISK DESCRIPTION RISK MANAGEMENT
Strategic Execution

The risk associated with the failure to effectively execute the Group’s strategy. Risk that the strategy does not produce the expected results.

  • Deliberated annual strategy and budgeting process
  • Employee objectives aligned to strategic objectives
  • Ongoing monitoring and review of strategy
People and Talent Management

The risk of loss of key personnel which may lead to an adverse effect on business growth and/or the retention of existing business.

  • Long term retention plans
  • Competitive remuneration structures
  • Succession planning
  • Maintenance of a strong reputation and culture which promotes an attractive workplace
Complexity and Pace of Change in regulation

Risk that the Group will not be able to effectively respond to a change in laws and regulation which could materially affect the Group.

  • Clearly defined compliance framework including compliance obligations
  • Established policies and procedures supporting the risk and compliance framework
  • Participation on industry bodies
  • Active and constructive engagement with regulators
  • Ongoing monitoring of new and proposed legislation that may impact the Group
  • Appropriate level of resources to manage obligations, change and complexity
Compliance

This risk of the Group not complying with laws, regulations, contracts, industry codes, internal standards and policies applicable to the Group’s operations.

  • Clearly defined compliance framework including compliance obligations
  • Established policies and procedures supporting the compliance framework
  • Experienced legal, risk and compliance teams
  • Ongoing monitoring, reporting and review of compliance obligations
Outsourced Service Providers

The risk of loss from failing to manage the Group’s key outsourced service providers whereby services provided by external parties are not conducted in line with the respective service level agreement.

  • Robust due diligence process
  • Clearly defined framework, policies and procedures
  • Regular monitoring and review of service level agreements and standards
Acquisitions

Risk that an acquisition is a strategic failure and adversely impacts other parts of the Group.

  • Robust due diligence
  • Engage subject matter experts
  • Deliberated annual strategy and budgeting process
  • Clearly articulated objectives and governance structure
  • Regular monitoring and strong reporting mechanisms
Information Security

The risk that investors or the Group may suffer service disruptions, or that investors or the Group may incur losses arising from system defects such as failures, faults or incompleteness in computer operations, or illegal or unauthorised use of computer systems, including cyber crime.

  • Business Continuity and Crisis Management Plans
  • Annual testing of Disaster Recovery Plans
  • Independent review of the design and effectiveness of internal controls
  • Cyber Security Incident Response Plans
  • Ongoing consultation with cyber security specialists
Investment Performance

The risk of loss of revenue resulting from ineffective investment strategies resulting in sustained underperformance relative to benchmarks and peers.

  • Talent hiring and succession planning
  • Clearly defined investment strategies and investment processes
  • Ongoing review of investment strategies and performance
Market

The risk of an adverse impact on earnings resulting from changes in market conditions, such as foreign exchange rates, interest rates or equity markets.

  • Diversification across asset classes
  • Diversification of investment styles and strategies
  • Strong investment performance
Financial

The risk of financial loss arising from the Group’s activities in the financial and investment markets.

  • Budgeting and financial forecast management
  • Ongoing monitoring and review of strategy
  • Maintaining of seed capital investments
Operational

The risk arising from inadequate or failed internal processes, people or systems or from external events.

  • Independent annual audit of the design and effectiveness of internal controls
  • Established policies and procedures
  • Regular testing of critical systems
Currency Risk

The risk associated with sustaining losses by having earnings, assets and liabilities denominated in currencies other than the Australian Dollar.

  • The Group does not hedge currency risk on its investments however, repatriates earnings into AUD on a regular basis

1.2 Roles and responsibilities

The Board is responsible for risk management within the Group, including the nature and level of risks that the Group is prepared to take in pursuing its strategies. The Audit & Risk Management Committee assists the Board in its oversight of risk management, financial and assurance matters. The Board delegates responsibility for the implementation of risk management to the Group CEO and the Senior Management Team.

Senior Management is responsible for implementing the strategic objectives and operating within the risk appetite set by the Board and for all other aspects of the day to day running of the Group. Management is also responsible for providing the Board with accurate, timely and clear information to enable the Board to perform its responsibilities.

1.3 Risk Management Framework

To ensure its risk management principles are met, the Group established a Risk Management Framework (Framework) shortly after listing in 2007. The Framework is based upon the AS/NZO ISO 31000: 2009 Risk Management – Principles and Guidelines and is subject to regular review and stress testing to ensure its effectiveness.

The success of the Group’s business is based on taking risks that are known, understood, assessed and managed within the limits of the Board Approved Risk Appetite Statement.

BTIM is a pure investment manager which uses global investment expertise to manage investment risk and generate wealth for clients. BTIM’s goal is to provide investment products that meet or exceed clients’ expectations. The key to success is earning the trust of clients over the long term. We aim to grow the business by successful investing over multiple market cycles. BTIM’s products are clear in their investment goals and transparent in their fees. BTIM’s culture encourages individuals to act with integrity and honesty and to value the interests of clients as the first priority.

Overall accountability for risk management lies with the Board; Management has accountability and responsibility to manage the business in a sustainable way, to enhance and maintain the reputation of the Group, to ensure compliance with legal and regulatory obligations and industry standards, to strive to achieve its objectives and to take all necessary steps to promote ongoing long term investment performance for clients.

The Group seeks to proactively identify all material risks that may affect the organisation and ensure these are dealt with appropriately. When assessing risk appetite, the Group has adopted a risk posture statement which specifies the acceptable risk level for each of the identified risks. The Group’s most conservative risk posture is in the management of critical areas such as key investment personnel, strategic alignment, reputation, behaviour, regulation, obligations to investors and oversight of third party providers. This means the Board has a narrower tolerance for these risks. In relation to risks associated with business growth and initiatives the Board accepts a higher risk appetite consistent with its strategic objectives.

The Board Risk Appetite Statement is subject to review at least annually. This annual process incorporates review of key aspects of the strategy and assesses whether adjustments to the risk appetite need to be made as strategy evolves.

Closing Funds Under
Management (FUM) - $billion

2012

46.6

2013

58.3

2014

66.4

2015

78.4

2016

90

45

0


Cash Net Profit (NPAT) - $million

2012

41.5

2013

61.9

2014

127.0

2015

132.5

2016

180

90

0

Dividend Per Share - cents per share

2012

12.5

2013

18.0

2014

35.0

2015

37.0

2016

50

25

0

Cash earnings per share (Cash EPS) - cents per share

2012

14.6

2013

21.3

2014

42.6

2015

44.0

2016

60

30

0