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Thank you for standing by, and welcome to the Pendal Group Limited FY '22 financial results. [Operator Instructions] I would now like to hand the conference over to Mr. Nick Good, Group Chief Executive Officer. Please go ahead.
Great. Thank you, everyone, for joining us today. I have Cameron Williamson, our CFO, here with me. We're here today to announce our full year results for the 2022 financial year and to provide some update on the proposed transaction with Perpetual, which I'll discuss later. Look, I'd like to start by saying that we've delivered a solid set of financial results. We have strong growth across our key metrics and that is in a difficult market environment. So, we overall feel pretty good about these. I do, of course, want to acknowledge that as previously reported, we've seen disappointing flows through the year and I'll address those in a second. But as you can see on this page, EPS is up 5% to 50.7 cents per share. Our management fees were up 10% to AUD 577 million. And pleasingly, UPAT is up 17% to AUD 194.2 million. And then on top of that, we've seen improved operating margins. So, you have a number of positive factors here. And overall, we feel good about the results, particularly given the macro environment that we've had over the last 6 months in particular. So, just turning to that point in a little bit more depth. 2022 has had a number of events that obviously have been talked about consistently, whether it's rising geopolitical tensions, Russia-Ukraine, interest rates, inflation fears and these have, of course, delivered significant market declines that impacted our FUM. And we've seen that through the course of the year. So again, to put that in context, it's part of the reason we feel that we've had some good outcomes given some of these backdrops. In addition, we've seen obviously really strong U.S. dollar, we've seen client caution. You've got cash levels at record levels, I think highest since September 11. You've got -- you see a lot of the fear of recession amongst fund managers is at a record level as well. So, you've seen a lot of client caution going on. And so that plays into FUM levels and into flows. So, as you look at the flows, and these are obviously published a couple of weeks ago, it has been challenging as you look across this, but we also have some areas that we feel more positive about. In the U.S., we've seen strong withdrawals from international equities through most of the year. And that's -- a large part of that has been U.S. dollar driven. As you've seen, U.S. investors pulled back from international equities and in particular, in international growth equities and growth-oriented strategies hit the hardest. Now that said, even amongst our own strategies, whilst the flow is challenging, they do appear to be broadly in line with the major competing products. The -- and against that, TSW has actually delivered in terms of diversification. Although the numbers are hit by a large fixed income mandate loss at the beginning of the year, there was a very low basis piece. Broadly, they've seen inflows in the U.S. equity in the multi-asset book. And the international equity flows have been very mild. The value-oriented strategies have set holding up well in the conditions. So, we're seeing that diversification play through in a positive way. In Europe, we obviously started the year with some tough outflows, but we've seen that really reverse in the back part of the year, with the last quarter being very positive. The -- and we've seen sort of a steady -- we've seen a steady shift in that. In particular, we've seen one large client, James's Place come through with a sizable additional investments in the fourth quarter and also in the second quarter, following a large redemption in the first quarter. So, that sort of strength of our client relationships has played through and we expect to see a lot of the investments that we've put in there start to pay off as we go into FY '23, notwithstanding sort of ongoing market conditions. And then Australia, which has obviously been a tough market for a period of time. We're seeing, again, areas of positivity. We've seen solid year of inflows across the wholesale channel, which we're very pleased with. And whilst Westpac has often remained challenging as we've gone through the separation with Westpac, we've actually seen some nice transferals there, and particularly the win with Tower Life Insurance where -- which sort of speaks to the potential for the business over the long term in the institutional space. Finally, the other thing I want to point to is that globally, we've had consistent inflows into our impact in thematic strategies, and we believe they are paused for -- poised for further growth moving forward. Switching to investment performance, the past year has been tough for active asset management in general. I've seen statistics of as much as -- as low as 40% of managed outperforming their indices across different market categories. And so whilst our 1-year numbers may not be as high as they've typically been, the relative performance remains very strong. And our 3- and 5-year numbers, which is the primary metric by which our clients view us remains very strong and certainly since inception ones too. As you can see, there are a number of areas of strength in our business. In particular, if you can look at global opportunities, there's bounce back after a really tough period this time last year and real concerns around -- around that, and they've done a lot of work to be well positioned, and you see that in the results and you see that in the flows. You also see the strength of the TSW franchise that I referred to earlier coming through and some real nice pockets of performance in our Australian equities business as well. So overall, some areas of real strength and again, what's been a tough market for active asset management. And then finally, we talked a lot -- I talked a bit about the cost control, and Cameron is going to talk a little bit more about that as we go through this and that's an area that we feel very good about how we've reacted to the market conditions. But against that, we've continued to invest. We've been careful about the speed of that investment. We continue to invest and prioritized against areas of growth that we think can really deliver for us. So, just running through this very quickly. In Europe, we've expanded our Continental Europe presence. We achieved our MiFID license in February and then have opened offices in Paris and in Munich, and those are up and running and fully operational. And we've continued to leverage our broader U.S. distribution network. And we've really strengthened marketing across the organization. We strengthened the leadership in the U.S. and U.K. and rolled out some really strong branding in Australia under the tagline of a better place, which focuses on our impact for our products. And if you haven't seen those, you really should, they're quite aspirational. And we've received very strong positive feedback from them. On the product side, we've continued to expand our fund range, an area that's sort of central to our strategy of how we maximize the potential of our business by distributing our products globally. We've continued to launch funds globally as best we can. And ESG and RI remains both a priority for us and a real area of strength. And the launch of the Regnan Sustainable Water and Waste Fund in Europe is an important market out and that seems steady inflows through the course of the year, particularly after achieving our MiFID license and being able to put people on the ground in Europe. From an infrastructure perspective, we've continued some really significant long-range infrastructure investments. Most importantly, we have fully migrated the Australian middle and back office to Northern Trust and we did that on time and under budget. And we've completed the migration of all of our support services from Westpac to new providers. This is material. This is a multi-year set of projects that have really delivered and I want to give credit to all of the team here at Pendal Australia for achieving that and what was a pretty tight time frame. Similarly, we've continued to migrate our middle office globally to Northern Trust for both the U.S. and Europe and that's expected to complete early in the New Year. And then finally, we said consistently that creating a home for talent is a top priority for us. We've progressed this in a number of areas under the leadership of our new Head of Human Resources, Claudia Henderson. And this positions us well to recruit and develop and retain the best talent, which is obviously critical to a people business like ourselves. So, that's covered remuneration reward structures, talent and development, we're planning around succession planning, global mobility and in particular, global diversity, equity and inclusion where we've completed a new framework and we'll be implementing in the New Year. So overall, as I look across the results, we feel good about the outcomes from a financial perspective, particularly when you consider the market environment. Whilst we obviously see some pressure on flows, we have been able to continue to invest and yet deliver a decent financial outcome for our shareholders. So with that, I'm going to hand over to Cameron, who will cover the financial results in a bit more detail.
Okay. Thanks, Nick, and welcome, everybody, to the call. As Nick said, it's a solid set of results, all things considering. At a headline level, we've got UPAT of a touch over AUD 194 million. That's up 17%, obviously assisted by the full year effect of TSW, which was the business that was acquired last year in the last quarter. Our earnings per share of 50.7 cents per share, a more meaningful measure of business performance. Year-on-year was up 5% and that's obviously a pleasing outcome. Average funds under management up 15%, again, assisted by TSW and while point-to-point markets declined significantly year-over-year, the average levels were actually fairly reasonable following COVID impacted FY '21. So, when looking at the average levels, which is a key driver behind the revenue line, we're looking at the MSCI, ACWI and local currency up 3%, similar levels to the Australian market. The U.S. market up about 7% and the U.K. market, 9%. So, on average levels, we are looking at higher average market levels, but as we head into the new financial year, clearly, at much lower levels given the volatility that we've seen in the back end of this year. Fee revenue itself up 8%, driven by base management fee growth. That grew up to AUD 577 million, up 10%. We did see a decline in the overall fee margin that declined 2 basis points to 46 bps. It is impacted by TSW, which is a lower-margin part of our book, given the nature of the client, which is largely institutional and sub-advisory and we did see performance fees -- another healthy year performance fees of AUD 51.9 million with the Global Select and Pendal MicroCap strategies, again, the biggest contributors similar to last year. The cost line, we're looking at cost growth of 7% year-on-year up to AUD 403 million. That is split fairly evenly between staff costs and non-staff costs, which were up 7% and 6%, respectively. And as I said, the cost to capture the full year effect of TSW were tightly controlled through the year, given the market conditions and the impact of revenue that we did see, particularly in the second half of the year. As Nick has alluded to, we did continue to invest in areas of strategic importance, particularly around our distribution in Europe and the operating platform here in Australia, where again, we fully exited our Westpac support services, which had been a multiyear project and completed all the migration to third-party providers, which sort of brought to end, I guess, the relationship there with Westpac from an operational perspective. At the operating margin level, we did see that expand to 36%. This was a highlight of the year, given the pressure on the top line, particularly through the second half of the year. Turning to Slide 11. You can see the revenue growth, up 8% to AUD 629 million. It was supported by the full year effect of TSW. You can see the contribution at the base management fee level was a touch over AUD 92.4 million. Other areas of the business did see declines as fund levels did come under pressure. Performance fees were, as I said, were healthy, but they were still down AUD 5.6 million versus last year on slightly lower Australian performance fees. The largest area of decline was in our institutional revenue, which was AUD 21.9 million lower. And that was impacted by some significant outflows that we did see in that December quarter of 2021. Revenue on the U.S. pooled funds and the OEICs were also lower as outflows impacted those channels. But on a pleasing note, we did see positive growth in our Australian wholesale channel, which grew a touch under AUD 2 million and was in positive inflow over the course of the year and what was a very challenging year from a flow perspective. Turning to expenses. You can see the expenses are also up 7% to AUD 403 million, substantially -- again, substantially impacted by TSW. Excluding TSW, costs were down 5% year-on-year. Now the bulk of these were variable costs. That's not surprising given the nature of our business model, high correlation between our cost line and our revenue line given our business sharing arrangements that we have. At the fixed cost level, we're looking at fairly flat year-on-year cost growth. This was much lower than the cost guidance provided last year, very judicious approach to cost this year as the year progressed. Headcount growth itself was largely muted through the year. We did see some growth but also saw significant staff turnover this year, probably about twice the level of what we've seen in prior years, but we're comparing to the industry in line with what the industry has seen over the last 12 months. As you've heard, we have progressed our strategic initiatives in certain areas, but in a more moderated way. We have pulled back in certain areas, particularly non-critical projects over the course of this year, but still found enough to invest in areas of potential growth or near-term operational efficiencies, particularly in the European distribution and on the Australian back office. Given the pressure on revenue, we remain very focused on the cost line as we enter the new financial year. And despite inflationary pressure, we would expect fixed cost to be in the very low single-digits in growth and in real terms, actually lower than what we've seen this year. Just on the balance sheet, you can see there that the balance sheet remains strong and healthy through these turbulent markets. We've got net cash position of a touch over AUD 250 million, fairly consistent with where we were 12 months ago. We do have some debt that was being drawn AUD 53 million. It's a USD35 million facility that was taken out for the TSW acquisition. That is repayable in 2024. However, will be extinguished if the scheme -- upon scheme implementation with Perpetual. So, it's a CP to the transaction and that facility will go. Our seed investments, you can see there of AUD 199 million, that's down from AUD 264 million 12 months ago. And back at the levels that we saw 2 years ago, and that has been impacted by the adverse markets that we've had over the course of the last 12 months. But also, we have taken out some money some of that redemptions where we've had some funds get to scale, particularly around our impact strategies and we've taken that back onto the balance sheet. So, the portfolio itself has come down a bit. Net tangible assets, you can see there, AUD 418 million. It's largely comprised of cash and seed investments and we're confident that provides a very solid platform for future growth of the business going forward. Turning to Slide 14 and the dividend. The Board has declared a final dividend of 3.5 cents per share, that's 100% franked and that brings the full year dividend to 24.5 cents per share and a 48% payout ratio for the year. Now that payout ratio is lower than the outstated range of 80% to 95%, but it is given in light of the proposed scheme with Perpetual and the timing around that. The final dividend will be paid in December with the expected timing of implementation of the scheme with Perpetual in January. As announced in the scheme implementation deed a couple of months ago, the final dividend of 3.5 cents per share is to be netted off with the cash component of the scheme consideration itself. And subject to the scheme going ahead, this will reduce the cash component to $1.941 per share from $1.976 as stated in the bid. So with that, I'm going to hand it back to Nick, who can take you through the rest of the presentation.
Great. Thank you, Cameron. So, turning to Slide 16, I've shared this multiyear vision before during the half year results. But I think it's worth reiterating as it underpins both our core strategy and our decision to offer -- to accept the offer from Perpetual in August. And so we think -- and why we think this is so compelling for both sets of shareholders. So to recap, who are we? We're a firm that's built on conviction. We have some of the most talented investment professionals in the world. We have a culture of integrity. So, we say what we do, and we do what we say, and that really matters to our clients and is a large part of why they believe in us and stick with us, a large part of our value proposition and we're really connected to our clients. And I hear that from our clients. Many firms talk about that, but I hear that from our clients, and they feel that they really know our fund managers and they understand how they are performing in different climates. And then in terms of our business, we have a fantastic business. We have incredible investment talent, as I just mentioned. We have a global distribution footprint that is pretty unique among similar-sized companies. We have a broad and diversified product set with a strong ESG and impact franchise and growing one. We have a strong balance sheet and we have a great model for transparent fund manager of remuneration that aligns with shareholders and clients and helps us attract some of the best investors in the world. That's who we are. But the critical part is our strategy, and that's sort of driven much of our decision-making, as you've heard before. So, let me provide a bit more context. As a boutique asset management business, we, like many of our -- many of the participants in the industry, have 2 conflicting strategic challenges. We firmly believe that investment performance is most effectively delivered through a culture of innovation, independence and nimbleness, and that's what attracts high-performing investment managers to our organization. However, we also -- and we see that the model we have attracts and retains those people and allows it to thrive and deliver for our clients. But we also believe and see the global scale and reach are increasingly critical. For example, to allow us to invest in digital distribution and value-added client services, in data and analytics to support the delivery of Alpha or ESG support or simply to be competitive on fees. And so to succeed, we must retain the benefits of boutique while simultaneously maximizing the benefits of scale where we can find it. From another perspective, how do we ensure that the whole is greater than the sum of the parts. So, we've been addressing that through our strategy, which is really built around sort of simplification and trying to maximize that whole. So, global distribution of our funds so that we can maximize the revenue from each strategy and maximize the marginal revenue. We invest heavily in product diversification and enhancing our existing strategies and in value-added services such as digital distribution, digital marketing. And then we simplify and scale our operating infrastructure everywhere we can so that we can reinvest that margin back into the business. And underpinning all of that, maintaining and investing in a culture that attracts and retains the best talent that allows us to deliver investment excellence and great client outcomes. So, that has been our strategy. That's been how we're moving forward. So, as we turn to the Perpetual transaction, the combination with Perpetual supports that strategy. We've spent months, very better part of 6 months, really getting to know each other's organizations. And I said in August, it's clear that the combined business enhances and accelerates our strategy. There's a strong cultural fit and this is a transaction that's driven by growth and about building a business -- and as a -- from a fiduciary perspective, we've had to look very carefully at our shareholders' expectations for the combined business because it's a heavy scrip component. When you look at these organizations together, we will have an expanded global distribution platform, greater diversification with real strength in ESG and response for investing, greater scalability in our infrastructure, which also allows for more flexibility for the underpinning boutiques, which is really important and a culture that sort of retain the underlying cultures and positions us well to continue to attract top-tier talent across the organization over the long term. As we spend more time with the Perpetual team, it's been clear that we share a common vision. The combination of the 2 companies will accelerate our ability to achieve it. And as we look at it, clearly, we can see the strength of Pendal, but -- and we can see how this accelerates our strategy. We can also see how Pendal really helps cement some of the investments that Perpetual has made over the last few years. We bring an established leadership team and management capability in the U.S., which can help run the combined organization well. We bring a real potential from our European business. So again, we look at this and we look carefully at the growth potential of the combined organization and we look at the cultural fit, we spent months and months of time working together to understand each other to really get to know the leadership teams. And there's a real sense of positivity around what this can bring for our shareholders, for our clients and for the fund managers here at Pendal. Now clearly, everyone will be aware that yesterday Perpetual rejected an offer to acquire that company. Very simply, we're unperturbed by this. We have a legally binding commitment with Perpetual, that stands in place. But more importantly, to the points I just made, both our organizations firmly believe that this is the right path forward that we're building a growth business and this will deliver an attractive outcome for our shareholders. So, we remain committed to executing the transaction at a timely manager -- timely manner. And we continue to work together to drive this business forward. Turning to Slide 18, as we look at the coming year, our core strategic priorities remain the same. However, with market conditions, we have to remain prudent in balancing costs while still building, investing in strategic growth areas. So, our focus is going to be very much on areas that have --on actions in areas that have immediate results, all ones that are underway already, so that we can balance that -- the overall profitability with investment for growth. So, a number of examples on this page, but clearly, a focus on client retention. Talking to our clients through difficult market conditions, helping them understand how our businesses will -- strategies will perform. And then looking for growth opportunities, particularly through our investments in Continental Europe, strengthening our digital marketing and building on that. We look to continue to expand the strategies that we have, how can we bring them to new markets. A clear example of that is the launch of Regnan Sustainable Water and Waste strategy in the U.S., and continue to enhance and invest in our ESG capabilities. And then completing sort of the major projects we have underway, particularly in Northern Trust migration, but also being pragmatic around other areas. So, a perfect example. We've been looking to consolidate our CRM across the organization. In the short term, we can make a number of enhancements that will deliver immediate benefits and wait to deliver sort of more fundamental investment when we see market conditions improve. So, really thinking about the balance of short term and long term effectively. So, if I turn to the final slide to summarize today's results, as I mentioned, the year has been -- has had challenging trading conditions and short-term flow pressure persists. But I'm pleased overall with the financial results we've achieved. The TSW acquisition is delivering the benefits we expected, both financially and from a diversification perspective. And we've been focused and disciplined in our investment for growth with a particular focus on distribution, on ESG and response to investing and on our operating infrastructure. And then in terms of the transaction, the regulatory approvals and client consents are tracking well. The Scheme Booklet is expected to be dispatched later this month. The Scheme Meeting is targeted for December 22, and completion is targeted for January in the New Year. So with that, I'm going to thank everyone and turn to questions.
Thank you. [Operator Instructions] Your first question comes from Ed Henning with CLSA.
Well, I guess you've kind of answered the first one, I just want to double check. Following yesterday's bid for Perpetual, have you had conversations with them and I imagine it's along the lines if you have -- about which you talked about, obviously, still wanting to work together going forward. The first one and then I've got one on the operational performance.
Sure. So look, we pretty much talk to them every day. Our goal is to try and make sure that this transaction, not just getting to the transaction, but making sure things are well set as soon as we move into the organization. We have a -- as I said earlier, we have a binding legal commitment. So, that is a very clear starting point. But we also have both the leadership teams and the Board very much believe in this. We believe this is the way future. We believe in building a business and that we're well positioned to build a very strong business together. So, that commitment isn't in any way changed and all what I expect it to be. And again, I go back to the fact that we're sitting with a binding legal transaction that we will be completing. And then your other question, Ed?
Now, can you -- you talked obviously today a little bit about the short-term pressures on flows and then some money coming out of U.S. investors on the global side. Can you just expand a little bit more on that? Do you anticipate and what you're seeing at the moment? Are you still seeing some money flow out just on macro concerns from U.S. dollar funds as a first part of it? And then can you just give us a little bit more insight into the pipeline you see at the moment where the pockets of underperformance you're seeing in your strategies or by geography? And are you seeing any wins in the pipeline coming through, again, by strategy or geography would be helpful.
Sure, Ed. It's a fairly expansive question. So, I'll try to cover it as best I can. So look, at an investor sentiment level, there's clearly been a big shift in investor sentiment in the U.S. You've got multiple years of U.S. equities outperforming. You've got this really strong U.S. dollar position right now and you've seen a lot of sentiment that sort of pushed against international and global investing amongst the U.S. investor base. And that particularly hit growth strategies, which obviously are a big portion of our business there. That said, much of that has already flowed through the market is my general sentiment. We saw sort of heavy outflows towards the end of the financial year and that continued a little bit in the first couple of weeks of this year, but they've moderated significantly. I don't want to call it too early, but we sort of sensed a lot of tax-loss harvesting and people making early decisions. And as we talk to our clients at least, they -- there's indications that they would be interested to come back into the market once they're sort of through the tax-loss harvesting and wash periods. Certainly, the outflows that we've seen are broadly in line with competing products of a similar size and similar heritage and performance level. So, we don't feel with particular market outliers. There have been no clients that have pulled back like from the strategy. There's been trimming. There's been tax-loss harvesting, but haven't been exits. And pleasingly, we're starting to see some clients and consultants show interest in coming back in. There's been so much negative market sentiment that people are starting to look and say, okay, where is the point to come back in. And sitting in the U.S. and just from my experience of talking to both colleagues in the industry and to my own adviser, that's certainly where I sense the shift is going. In terms of pockets of growth across the organization, I touched on some of these already. Clearly, our ESG impact franchise in all markets. So here in Australia, the sustainable strategies, the Regnan Water and Waste, the equity impact, those are areas that have shown steady growth through the year. And the expansion into Continental Europe allows us to bring those products effectively to European clients. So, that's -- it's a particularly -- European clients are particularly focused on this space. And we are now in a position to bring those products to them. And we've seen actually a number of small wins already. So, we've seen clients that we really haven't had before in France and Germany starting to either give us small allocations or show interest. And so I hope to see that continue to expand well. And then here in Australia, obviously, it's a tough market from an institutional perspective and we still have the sort of separation from Westpac, but we're seeing ongoing positive results out of the wholesale channel. That's had multiple years of inflows there, which is great. And I mentioned the sort of tailwind that felt very good. That showed our ability to compete effectively in the Australian market. And my -- I've got a lot of respect for the team here, the leadership team, the investment team, the investment talent. And I think we have every reason to believe that can start to turn around as we see some of these pressures from Westpac diminish. So, it feels particularly good with the wholesale channel there.
But just to kind of, I guess, round out the pipeline as you see it at the moment, obviously, some challenges, but you're seeing some inflows, but in the near term, just a little bit cautious. But as you said, on the U.S. stuff, a little bit more optimistic, investors will come back in at some point. Is that kind of a good summary?
Yes, I think that's about right. I mean, the sort of -- there's so much negative news priced into the market. There's so much investor caution. And I said earlier, the cash levels haven't been this high amongst investors since September 11. So at some point, that has to come back into the market. There's clearly some Black Swan events that are still out there that could happen that could trigger even more risk in the system. But from our perspective, we've stayed close to our clients, we're focused on client retention. And the key is to be ready with good quality strategies as and when they're ready to come back into the market.
Your next question comes from Elizabeth Miliatis with Jarden.
The first one is just on your cost growth, particularly the fixed cost growth. Just curious if you're actually able to sort of quantify the way you fell for the full year '22. I know you do make comments that it was below where you had guided? And then what particular things you pulled back on and then going into FY '23, I think you said mid-single digit to fixed cost growth. Just clarifying that one as well.
Yes, I'll take that. So yes, thanks, Liz. So yes, look, this year, we did come out lower than expected and what we guided on 12 months ago. I mean a number of reasons behind that. I think the staff attrition, which we talked to earlier. And I guess as stuff did leave, we did and things -- the markets were obviously quite rocky, and we had some outflows, particularly in the -- earlier in the year. That did have an effect in terms of the pace at which we rehired and so we did have some savings around that. And we have been quite judicious around that as new roles sort of come up and we're moving forward. There were areas that we did pull back on from a project perspective. I think there were areas that we had to get done and there's areas that we wanted to get done. I think the areas that we wanted to enhance our operational platform, particularly around our sales data sets on our CRM and our website and things like that, that we've put on hold for now. And so that's -- there were some savings around all of that. Included within that, there was probably some benefits that we had this year, quantifying them at around about AUD 4 million that I would class as nonrecurring benefits this year. One of which was in regards to some lease reimbursement in regards to our outgoings in the U.K. and one in regards to some irrecoverable VAT again in the U.K., and our Irish operations as well, where we've got some benefits associated with that, that approximate about AUD 4 million that sort of you can sort of back out from a recurring run rate. In terms of our outlook for next year, we are looking at low-single digits. So, it's not mid-single digits, it's low-single digits, both staff and non-staff, but given we have priced in inflationary cost growth within that. So, some areas that we are looking to pull back and again, be a bit more moderate in terms of what we're doing. A number of the big platform build-outs that we've done here in Australia with regards to migration around the operational back office, again, you're going to start to see some efficiencies off the back of that come into the business in the next 12 months, and that's part of our cost growth guidance that we're providing today.
And then my second question is just around the fee margin. You did point to that margin sort of pulling down by about 2 bps year-on-year. Just curious, is the FY '22 number roughly where the spot sort of fee margin would be as of September or might it be a little lower?
It's probably pretty close. The run rate might be -- does move around at the pace at which markets do. Obviously, as equity markets come down, given the equities book is a higher margin part of our business, clearly, the fixed income book doesn't move as quickly. And so that was cushion, it's asset mix does play out. But where we sit at the moment, 46 bps is a pretty good estimate, I guess, in terms of run rate for the '23 margin. But as I said, it does move around with markets and outflows and inflows over the course of the year.
Your next question comes from Brendan Carrig with Macquarie.
Sorry, are you there? Can you hear me?
We can hear you.
[indiscernible] connected properly, apologies. Just a follow on from Liz's question there on the margin. So, just maybe calling out specifically, the EUKA seg mandates and the U.S. pooled line items. So, half-on-half, it looks like there was a pretty material margin decline there of about 4 basis points. So, I wouldn't have necessarily thought that was a fixed income, particularly in U.S. pooled. So, is there anything specific you can call out on those line items because then that obviously drives the exit margin for those 2 asset classes specifically?
Yes. I mean the U.S. pooled would have been impacted by the international select outflows that we've seen in the back end of this year. It is higher margin relative to the average of that book, right? And so as that book has declined and it's largely been out of our International Select Mutual Fund, that will have an effect on that U.S. pooled overall rate. So, that answers one. And then on the -- Brendan, you're saying the EUKA institutional?
Yes, EUKA institutional, was a similar quantum of about 4 basis points half-on-half.
Yes. I mean that's a mix, right? So, we lost some money earlier in the year, if you recall, we won some money later in the year, same client, but there is a resetting of some of the fee arrangements associated with that, that account. And so again, depending on the movements of client money, that's more of a mix shift in terms of the overall book in terms of the institutional account with that client.
And then my second question, just on the comp ratios. So clearly, the lower markets have driven the comp ratios higher in the second half, given the fixed component of the expenses. But just given the sort of the consistent uptick of 5% to 8% across the 3 divisions, is the second half comp ratio, sort of the run rate cost ratio we should be thinking about going forward? Or as earlier to your comments on managing costs, do you think that, that comp ratio can be managed lower into FY '23, even absent markets recovering?
No, I think, look, I don't think we're going to -- we've held the comp ratio pretty flat this year, which is a really pleasing outcome given the revenue hit that we've had this year. I would expect to see our comp ratio trend higher even with holding the costs as tight as we can and being very diligent around the hiring process, et cetera. So, I would anticipate that we're going to see some pressure on that comp ratio in the absence of a significant market recovery.
So, that second half exit comp ratio is probably a more reasonable starting point to go from a go-forward basis?
Yes. I mean yes, it is.
Your next question comes from Andrei Stadnik with MS.
Just first one, I wanted to ask around our performance fee potential. Just just looking at some of the performance in some of the individual funds have done quite well in the last year or so. Are you able to make any comments in terms of like how some of these funds are positioned against the watermarks?
Yes. Look, some of our larger funds, Andrei have declined. I mean we've got some of our larger U.K. and European funds, which are probably further below their high watermarks than they were at the beginning of the year. One of our European funds actually pushing right up against it. So, that's the Continental Fund. So, that's a pleasing outcome. I think where we sit at the moment, some of our mandates are sitting above their high watermarks. The larger funds that have contributed to the performance fees in recent years, in particular, the Global Select Fund is obviously now well below its high watermark. So clearly, that's creating some outperformance that needs to be recovered before it can get back into performance fee territory. In terms of the funds that are pushing right up against it, as I said, the Continental European fund is probably the largest of the funds that's within touching distance at this point in time.
And my second question, I just wanted to ask around like distribution initiatives just in terms of any new distribution vehicles you are thinking about and like active ETF have been doing reasonably well in Australia and the U.S. I just wanted to ask in terms of distribution initiatives that you've been thinking about investing in. Like what are some of the highlights?
Yes. So obviously, from a pure distribution perspective, the expansion into Continental Europe has been a big push for us and a big area of investment for us over the last year and then try to make the most of the combination of TSW and the existing Pendal business in the U.S. in terms of maximizing the distribution there as well as sort of a shift to -- pivot to wholesale here and then investing in digital marketing generally in terms of upgrading the marketing talent. So, those have been a number of the areas which we've already referred to and that we want to continue to push forward. In terms of product vehicles, which is sort of where I think the conversation pushed, we -- look, I came from an ETF background. I ran the biggest ETF company in the world. So, I know a bit about that space. It's one where there's some interesting opportunities, but you have to really invest significantly to be able to operate an ETF franchise well. The active ETF business here in Australia has actually been probably a bigger success than elsewhere on a relative basis to the whole market. And so it's certainly something we look at and we consider, but it's not sort of the biggest priority for us. The area where I'm more interested and we've talked about before and we continue to explore ways of maximizing the potential is around our SMA platform, particularly in the U.S., where you're seeing a significant shift in market away from managed funds towards SMAs, given their benefits from a tax-loss harvesting perspective, cost perspective. And now that the technology is in place to be able to offer fractional shares and really run SMAs at relatively low levels. We have a couple of strategies that we think will be pretty compelling. And we do have a number of strategies already in the market in that space. So, we do look at active ETFs, but there's a lot of infrastructure behind them in terms of supporting the trading, whereas we think we're better positioned around some of the SMAs where there's a much lower competition, which is as much a driver of success than anything else. And we think we can do stuff much more easily.
[Operator Instructions] Your next question comes from Lafitani Sotiriou with MST Financial.
I've got 3, if I may. And the first one is just in relation to some of the commentary around the flows. And if you look at the language, it's quite -- it's changed quite a bit over the year, the comments around short-term flow pressures persist and there's a strong focus on client retention over the year ahead. And with the context of -- in the last year, you've lost around 10% of your [ funding ] net outflows. Can you just talk a little bit more around the client retention strategy to do with the merger? And do you anticipate much leakage if the merger goes ahead?
Thanks, Laf. Good to hear from you. So, to answer the second half of that, no, there's no concerns. We've had -- we're through a lot of the client consent already, the vast majority have indicated their support for it. In the U.S., we require proactive client consent, so they actually have to confirm. We've still got some work to get through, but that's primarily around the mutual funds, which just takes a period of time, and we don't anticipate any problems there either. Clients tend to understand the deal. They understand the strength of it. We've got a lot of support from the fund managers and that's really where they look. And if the fund managers say they're on-board with this, and they believe this is going to help them continue to do their jobs effectively, our clients tend to agree with that, and they've -- that's certainly what we've heard through the year. In terms of where we talk about the shift to client retention, it's much a reflection of where our clients are. They're anxious. They're not sure what they're doing. They're bringing stuff into cash. And so as much as anything, the term refers to the fact that we're just spending a lot of time with our clients. We're not going out and trying to aggressively, particularly in say the U.S., but aggressively pursue new mandates at a time when everyone is very cautious. And the important thing is the clients that have trusted us with their money for the last 5, 10, 15 years, in some cases, continue to feel confidence in that we know what we're doing and our strategies are solid. And that sort of -- that's generally what we've found as we've gone out. So no, it's not an area of concern at all. It's more a reflection of how do you handle sort of ongoing volatility in the market. 6 months ago, this was just starting. And now we're in a pretty heady space and there's a lot of client anxiety out there and we just need to be receptive to it.
Why don't I move to the second area and just wanted to unpack some of the cost commentary. So, so far we've got, I think was there comment that it was around -- I missed some of it. There's AUD 4 million-odd in positive lease write-backs, et cetera, in the U.K. Is that right in the cost base that is one-off in nature?
Yes. That's -- we've got AUD 4 million sort of nonrecurring one-off items, but that is one of them that sit within that. It's probably slightly less than half of that other areas would be in regards to sort of irrecoverable VAT as well as some of our accrual releases that were slightly higher than we anticipated. So, which we're not expecting to get the benefit of. So look, all in all, that about AUD 4 million I would class as nonrecurring in our P&L this year.
And it's included in the underlying results?
Yes.
Is there a reason for that or...
Yes. We don't back out those types of things of our underlying. We have a pretty strict sort of definition of what we class as underlying profit and sort of the sort of non -- we call them out as nonrecurring, but we don't back it out of our value.
So, the legal expenses and staff in association with the transaction, one-off in nature are backed out, but these write-backs, which are positive in nature, AUD 4 million aren't back down. So, can we just go on to the compensation ratio. So, there's one part, there's some one-offs included in the costs excluded or benefiting of AUD 4 million. Then the comp ratio, you're guiding it going higher in the next year. Can I just -- as a third plan, can I just unpack the amount of expenditure that you may have deferred or projects that you hadn't already started because there's a transaction happening? So, did you -- was there much that you decided not to do during the period?
So just before I answer that, just on your second question, I do want to be really clear that whilst the transaction costs are not -- are backed out. If those accruals have been in the wrong direction, we would have been charging them as one-off them to the negative. So, it's not the way we're pulling out negative numbers and keeping positive. To add to Cameron's point, we have some very strong structures in place for how we record what goes into underlying. And as we're looking at cost opportunities and particularly a tough market environment, we're trying to find ways of finding additional things we can do, and we'll continue to.
Sorry, sorry, just on that. Laf, we spent AUD 3 million to AUD 4 million last year of one-off costs associated with the mutual fund transition that was one-off. We didn't back that out of our UPAT. That was part of our ongoing so we call it out, but we don't back it out of our UPAT.
To your sort of final question, the third question. No, there wasn't stuff that we stopped because of the transaction. The reality is the work that we're doing in terms of investing in the business is going to benefit us as a combined organization as well. There is stock we slowed down because of market conditions. And to Cameron's point, the stuff we needed to do and stuff we wanted to do and within the wanted to do there's stuff with shorter-term returns and longer-term returns. And so we just prioritized amongst that. The core of management of a business more than anything else, it's balancing your investment against your profitability, your long-term growth against your short-term profit. And so as market conditions shift, you have to manage that with it and we think we struck a pretty good balance this year between continuing to invest in the areas that we really think will deliver what we really need to do like the transition to Northern Trust, like the investments into Continental Europe. It will take some time to show real impact whilst also merging around profitability. So, we just tried to strike the right balance there, but it was not driven by the transaction.
And this my last question is in relation to some of the news yesterday in potential bid for Perpetual entering the mix. And I know you made some comments that you're unperturbed and you mentioned a few times that you've got a legally binding contract in place. But obviously, we're all aware there's a break fee and these things can be broken. So, is there a plan B that the Board and your management are discussing if the deal does fall over and you still got to get through a Scheme Board? And like when I say is there a plan B, do you just go back to business as usual? Is your ambition, which you put on the table now to grow? Are you looking for another partner, another transaction? If you could just add some color, that would be great.
Yes, sure. And look, I know, as you said, I've said this a few times before, but I'm going to say it again, we have a legally binding contract. We fully believe in what we're doing, both management teams, both Boards fully believe in what we're building. There is -- we don't anticipate any problems with the Scheme Boards. We're very much moving forward with the part that we've laid out. And there's no equivocation on our part about that outcome. To the broader fundamentals, we have always believed in our existing strategy and this is an extension of that strategy. We continue to believe in our strategy and we continue to believe that this accelerates and will drive our business forward. So, there's no disconnect between how we went from before this deal to where we are now and what we're doing going forward. So look, we continue to be confident about where we're going. We think it delivers for our shareholders. We think it delivers for our clients and for our team. And we feel good about it. The one other thing I may add, I've been involved in 3 transformative deals during my career. And in each -- the biggest thing BlackRock's purchase of iShares when I was at iShares. In each case, they've been highly to wildly successful. In each case, there was quite a bit of skepticism at the time. So, we've spent a lot of time 6 months getting to know each other, getting to know the cultures, getting to know the growth potential. And we know that we can build a really interesting business together. So, we're excited about where we're going.
Your next question comes from James Cordukes with Credit Suisse.
Just a quick question on the dividend. So, the final dividend was obviously cut pretty significantly. I appreciate that would have reduced the scheme consideration anyway. But why not pay a large dividend and get it to investors' hands earlier? Were there any tax considerations there? And if the deal doesn't go ahead for whatever reason, would you still return some of that cash to shareholders?
Yes. I mean, look, James, look, the scheme did play a part in terms of how we thought about the final dividend. And clearly, it was announced 2 months ago that the final dividend was going to come off the scheme consideration. The reality is if we had -- if the scheme hadn't closed in December, there's a good chance we wouldn't have paid a dividend at all, right? We just wrapped it into the consideration itself. As it is, we are looking at a January close and the way we thought about that, there was an element of cash flow needed particularly with our significant retail shareholders who were on the register to provide some element of cash flow through that period. So, we did pay out a lower dividend to reflect that. But on the basis that they're going to get a -- get their consideration in January as a result. And so there was no need. The other area was we were looking at -- and in discussions with Perpetual about looking at sort of conserving a little bit of cash as a result of the dividend and that, again, did play out with our thoughts around the size of it relative to the timing of the consideration that was going to get paid to those investors.
There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.