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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, everyone. Welcome to the Schroders' 2021 Full Year Results. We've got lot of people on the line today, so we're going to try and mix it up between the room and online. But well I can start the normal format, I will take you through big picture flows. Rich will take you through the financial numbers and then we'll do Q&A both in the room and online.
So, just starting with the high level numbers. You've seen these with top line grew 18%, profit before exceptionals, up strongly. Cost to income ratio down slightly. Number we're proud of £35.3 billion of new flows. But importantly, the underlying drivers of this strong performance in our Private Assets business, strong performance in Wealth business, but also good organic growth coming through from our traditional core business. And I think we'll talk more about that. But the investments we've made over the last five years really start to come through across the business in terms of decent organic growth.
Getting into the detail, we are nothing without being able to produce strong returns as an active manager. We were very pleased our three-year performance number. Last time we got together a year ago was 74%. To-date, it's 79% of funds outperforming over three years.
But what that actually means in fact is I've take here the top 25 funds across our fund range. Over five years, these funds have outperformed their index by 16.1% net of fees. So, as an active manager, the importance of making money for clients is absolutely essential, and I think that's a good way of demonstrating what that 79% means to people at the end of the day in their fund.
Assets under management reached a new high of £732 billion. I put on the right-hand side the mix of revenues across the business. Clearly, when you've got a compound growth rate of 10% across your business, all areas are growing. But what we're starting to see is those high margin, high longevity areas growing as an increasing portion of the group. And I'll come back and talk about what that's meant for the longevity of our business and the stickiness of clients. But the dynamics of that virtuous circle of growth starting to come through here.
In anticipation of the question, if you look at the AUM growth rate ex-joint venture associates, it's still 7% compound over that five-year period.
Just a quick reminder in terms of strategy. This chart won't be new to you. It's precisely the chart that we've shown really for the last five years. We're wanting to get closer to our end customer to improve our client stickiness and avoid disintermediation. We're reinventing our core asset management business by doing more in solutions, more in the attractive contemporary products, more in sustainability, expanding our geographical reach so that we're doing more in North America, more in Asia and what you see in those areas coming through.
And then obviously, we've talked a lot about this, the attractions of private markets. And over the five years, clearly, the markets recognized the attractiveness of that segment but client longevity and revenue margin, that's the strategy. What I want to do now is link the results directly to this.
Here's our overall flow picture for the year. We saw £20.2 billion of new flows coming from our JVs and associates, particularly in China and India. And I'll come back and talk more about that. And on the right-hand side of this chart, you can see those high-margin areas delivering £19 billion of net new business.
Institutional saw a small outflow, but there was quite a lot of churn within that and actually I'll move towards higher margin areas within the Institutional business. Actually, the net new revenues was £6 million that we earned in our Institutional business. So, if you looked at our asset growth rate, you get to a 5% organic growth rate.
To my mind, that perhaps the more important number, if you just take out, take out the joint ventures and associates for a moment, and look at the annualized net new revenue that are coming from those five business areas was running as an organic growth rate of 7.3%. So, £144 million of net – £145 million of net new revenues which is coming from the traditional asset and wealth management business, is a 7.3% organic growth rate on net new business alone in 2021, a number that we're really pleased with because that's the – that if you like, is paying the bills this year, but also providing the base for future years.
Then I'll just give you the stats for this, if you look through a geographic lens or product lens, Private Assets and Alternatives saw £6.9 billion of inflows. Our equity business saw £3.8 billion of inflows. Our fixed income business saw £2 billion of inflows. Our multi-asset was out by £1.7 billion. Within equities, the major areas of inflow were global – was global equities. The major outflow was quantitative equity. So, there's a nice mix change within there.
The other areas to talk about is geographically, we saw Europe was the strongest market £7.1 billion of inflows into Europe. £5.3 billion of inflows into North America both retail and land institutional. The UK saw small outflow, as did Asia ex-associates of £0.2 billion, UK was £1.2 billion out. Clearly, the Asian business was flat very much if you add in joint ventures and associates because we saw £20 billion of net inflow into Asia.
So, to my mind, a really rebalancing of the group but growth where we wanted to see it. So, that underlying revenue growth rate of 7.3% compound in the organic business.
So, we've talked a lot about trying to reposition the business into areas where there is fast flowing water and this has not got the consolidation adjustments in, but I wanted just to demonstrate those areas that we talk about some strategy, saying we can see new growth in those. So, if you – look, we talked about the joint ventures. But Schroders Capital, our private assets business, so this without the alternatives saw £7.4 billion of inflows, and that's before £2.5 billion of dry powder, which we have not invested and we don't include in our assets under management.
You'll recall, for those of you who attended our Capital Markets Day, that we said we would be able to achieve growth of £5 billion to £8 billion for Schroders Capital business. We've done that. In fact, if you think about the dry powder, we've actually exceeded it, but we've done that here.
Article 8 and 9 funds, those funds which are focused on sustainability in Europe, £5.7 billion of inflows. Thematic funds, an area of big growth, £4.4 billion of net inflows. Wealth Management I'll talk more about. North America, we said, is a strategic priority; again, very strong inflows both in North America and in South America, areas that we've put in organic investment and we're now seeing the payback from those areas.
So, to my mind, what this is demonstrating is the strategy we put in place is coming through across the areas that we would expect it to do so.
And if you look at that in a bigger picture and go back to those things, the areas we've talked about, Private Assets, Wealth, Solutions, those have all more than doubled over this period. And I think, to my mind, that rebalancing of the group, which is going on nicely and that's – from Richard and I's perspective, the more we can do that, the more that enables the revaluation of the business to be driven by the quality of the earnings that are coming through.
Just going back into Wealth Management, to my mind, we've set out, again, at the Capital Markets Day that we hope to achieve 5% organic growth rate from next year. We've actually achieved it this year with a 5.7% organic growth rate. We've excluded from that number another £0.6 billion of MPS flows because that's serving existing clients so it didn't fit our definition of NMB. But nevertheless, even without that, that 5% growth rate has been achieved.
Just quickly in terms of the breakdown, I've shown this on the charts. But what was important to us was that they show the Personal Wealth business, having been an outflow for many years, has turned positive. We saw a very significant change in the Lloyds' rate of referral. So, if you go back to last year, we had 22,000 referrals. This year we've had 56,000 referrals and 103,000 meetings, I think, if I recall correctly. So, we're starting to get to this business to becoming industrial scale. But once you've turned that corner on net new business, I think our confidence of seeing that grow nicely from here is clearly growing stronger and stronger.
I've mentioned I'll come back to joint ventures and associates. This has been clearly an important part of the driver, but it's increasingly a dependable part of our business. In India, we're now the largest equity manager. Our market share increased from 5.6% last year to 6.7% this year. And the BOCOM FMC venture – joint venture, assets increased 32%. So, India and China growing strongly and we see it as a potential for future growth that being clear.
Now, the bit that we haven't yet got in these numbers is the launch of our WMC. That formally launched on the 28th of February. The first products will be launched early in April. We anticipate that being a significant additional driver to growth going forward.
And then, later in the year, we will launch our wholly owned FMC business, which we – that we'll expect will take longer to ramp up. But nevertheless, the WMC, which is a 51% owned business, we think, will ramp up pretty quickly. So, overall, those businesses all demonstrating good growth, and I think the dynamics of future growth also looking strong.
The issue on sustainability is not new to anybody here, and I'll put just a few proof points on this chart, because I think it has to be taken in the round. There's no single answer that demonstrates whether or not you're good at sustainability or not. But to my mind, what we're able to look at is we're the – pretty well the only major asset – [ph] well, the only (00:11:24) major asset manager to have set a science-based target, have that approved, CDP rating of A- is a very strong rating, MSCI rating of AAA, £5.7 billion of new flows in sustainable assets.
The acquisition of Greencoat last year, I think, looking increasingly timely. Not only clearly you're going to see a very rapid acceleration of renewable energy in Europe for very tragic reasons, but that trend is just going to be accelerated. But also, if you think about the change to Solvency II regulation, is going to enable a wider set of insurance assets to also want to invest more into renewable energy.
So, I think net of our efforts here coming through really very strongly, our brands in this area are performing very strongly, our engagement with clients being very strong. And I think this is a critical battleground to win. You've got to be good at it as a business, but you've also got to be good at it as an investor.
Private assets, final piece of those variables. I've mentioned the £7.4 billion of flow from Schroders Capital. You'll hear later that following on from the acquisition of Greencoat, we think it's appropriate to increase that objective we set in the past. So, we've previously said we thought we could do £5 billion to £8 billion of new business growth a year. To my mind, that number probably needs to be nearer £7 billion to £10 billion of net new business growth a year. So, we will change our guidance on that, because we – not only do we do £7.4 billion of growth, but we also had £2.5 billion of dry powder.
And just to reconcile for you that number different, Schroders Capital did £7.4 billion. We had a small outflow from our liquid alternatives business, which is why the division, that £6.9 billion of flows just to tie those two numbers up.
Now, we talked a lot about the importance of creating more client longevity. And I thought that this chart was – just trying to make that point very clear to you in terms of what the impact of the changes we've had made looks like on the business, and it looks at our outflows as a percent of our assets.
So, our longevity may have gone over the last five years from 4.1 years to 5.3 years. But the stickiness of our assets, so for every £100 billion of assets, 25% used to flow out every year previously. Now, that number is 17.6%.
That, to my mind, means we're running a lot less hard to stand still, and it's one of the key differentiators. If you benchmark those numbers against the rest of the industry, you'll see we start with an inherently stickier book of business, which means that the sales that we make are much more likely to translate directly into net new business rather than just gross inflows.
So, I think a metric which isn't often measured, but a really important one to draw your attention is that transformation is working through. And I think, given the changes we're making, we expect that to carry on flowing through into future years.
So, we've obviously done a bit more this year to drive that strategy harder and I think we've made three strategically important acquisitions. I just want to spend a moment talking about the rationale behind those. And I'll start with River & Mercantile because that was a really important acquisition in the UK fiduciary management market.
When the CMA came in, reviewed that market, it was very clear that there was an opportunity for a new entrant to be more disruptive to enable a more rapid scaling of UK pension funds wanting to transition towards buyout. Clearly, a lot of that is going to be done through private assets as well.
We acquired the River & Mercantile business, fantastic to see. And the pension [indiscernible] (00:15:48) River and Mercantile, the fiduciary management of the year so, clearly, got something right. But what has been really interesting, since we acquired that business, we've already won a number of new mandates. And now anybody who knows the pension fund well, you don't win new mandates immediately after change of control.
But I think what you're seeing is the clients saying that the combination of Schroders and River & Mercantile makes really good strategic sense and having a new competitor in that space is unlocking a lot of pent-up demand. So, an important acquisition and one where we expect to see follow-on growth. And then a really important acquisition from a solutions perspective because the duration of these assets I think is near 17 years. So, again, pushing on that point of stickiness of assets.
Greencoat, for very different reasons. I mean, more and more clients are engaging with us saying how do we go on our decarbonization journey. Very obvious thing then to do is to own more negative carbon assets and renewable energy assets. Clearly, Greencoat has performed very strongly in the past. We would expect to see good inflows in the future, hence, the reason we've upgraded our private asset target of future growth. But it's an important and rare asset in being able to offer that full suite of products to clients.
And I think there's a really important point here. There are very, very, virtually perhaps one other asset manager that's able to engage with clients right away through from an LDI perspective, all the way through their public equities and all their private markets engagement. And that that total engagement is becoming more and more important to clients. As you say, how do I solve the whole of my investment problem? And as you think about a world where returns are low, inflations are high, we expect strategically that market to grow very significantly. So, being able to fill all these pieces so you can have that holistic engagement will position us very strongly.
I should mention Cairn not because it was a big acquisition, but because strategically, it provided the missing piece of our European real estate. We didn't have a Dutch real estate [indiscernible] (00:17:50). We've now got a pan-European real estate [indiscernible] (00:17:54) in every country we're strong. So, that will unlock both Dutch demand, but also pan-European demand, and that's an important step. So, we feel that we've made good progress in building out the last bits of our private asset jigsaw over the course of the last 12 months.
So, what does that mean in terms of that virtuous cycle of – as we've done more in these three areas, we've enabled us to do yet more and more. So, when we did the Lloyds transaction, off the back of that Schroders Personal Wealth, we've been able to open up a regional network for Cazenove. We've also been able to open up a major family office business so, for – right at the top end of the market. So, we've got a lot closer to consumers from the £100,000 client, right the way through to the £500 million client. And that virtuous circle has been reinforced.
We've put organic growth into our Asset Management business and this is really important because this is a business which I think most analysts said it's going to really struggle. It's got major pricing power, indexation, etcetera. But through launching the right products, growing in the right geographies, making that organic investment, we've seen good organic growth coming from those areas. And I think with the WMC launching this year, with more sustainability product and more Thematic products, with 79% of our funds outperforming, we're demonstrating that you can grow as a good active manager.
And then finally, we've built out a suite of private asset products and, I think, now putting our solutions capability on top of it so, combining them together into an income solution or a holistic private markets product for smaller pension funds, we're able to really address markets that perhaps others aren't able to get to.
So, that strategy is starting to open up, as we've gone through, opens up yet more optionality to do more in other areas. And so, we're pleased with the progress this year just from an operational perspective, but also because strategically I think we're starting 2022 in better shape.
So, lots of good things happening. I've touched on many of them. The one I probably haven't spoken enough about is the importance of talent. You will have read lots of words about talent retention. I can say that our talent retention has remained at extremely high level. 84% of our employees are shareholders. Our talent retention rate is over 94%. It feels to me that we're in a good position to carry on retaining the people who've been driving the strategy which is, frankly, the most important thing from a delivery perspective.
With that, I'm going to hand over to Richard who'll talk more about this year and I'll come back for the outlook and we'll go from there. Thank you.
Thank you, Peter, and good morning, everybody. I'm really pleased to be taking you through what I believe are very good set of results. This performance reflects a lot of what Peter has talked about already. In particular, the results show firstly, very good growth in our strategic focus areas of private assets and wealth; secondly, the success of our ventures with BOCOM and Axis; and thirdly, high growth in our core asset management business especially mutual funds, which were in high demand.
As a result, we delivered profit before-tax and exceptional items of £836 million, which represents a new high, and our profit after-tax increased by 28% to £624 million.
Now, for some more detail starting with net income. Net income increased by 18% from £2.2 billion to £2.6 billion. The largest component of this was the increase in net operating revenue, which grew by £350 million to £2.4 billion. As you know, average AUM is the main driver of our net operating revenue. This increased by 15% to £597 billion, excluding joint ventures and associates in our Asset Management segment.
There were two main reasons for this. The first was the rise in markets which, net of currency headwinds, drove an increase in average AUM of around £55 billion. This translated into £204 million additional net operating revenue. Secondly, our net new business led to an increase in average AUM of approximately £20 billion. This generated £101 million in additional revenue, including a tailwind of £14 million from net flows in 2020. And turning to 2022 for a moment, we have a tailwind of £58 million at the start of the year due to net new business we won in 2021.
The next largest increase in our net operating revenue came from performance fees and carried interest. As you've heard from Peter already, we delivered strong investment performance for our clients during the year. This enabled us to grow performance fees and carried interest by £31 million to £126 million. £23 million of this increase came from carried interest, an important part of the overall contribution from Schroders capital. And virtually all our performance fees are from institutional clients.
Looking at performance fees and carried interest over a five-year period, you can see that normalized level has increased over time. This time last year, we increased our guidance to £70 million based on a three-year rolling average. The three-year average has now grown to just under £100 million, highlighting the increased value of this revenue stream. Although given markets in January and February, if I were you, I might haircut this back to last year's guidance.
Now, let me talk you through how all this breaks down by business area, starting with Wealth Management. In here, we explain how [indiscernible] (00:24:11) Wealth Management business and its significance to the whole group. The segment has shown good progress during the year. This is illustrated by the growth in annualized net new revenue as shown in this slide. Average AUM increased by 17% to £76 billion, which drove an increase in management fees of 21%. Net operating revenue increased by 15% to £421 million. Within this figure, the growth in management fees was partly offset to reductions to transaction fees and net banking interest.
Peter has talked about the progress SPW has made during the year. Its net operating revenue increased by 12% as it started to emerge from pandemic-related constraints. Across the Wealth Management business as a whole, the net operating revenue margin, excluding performance fees, decreased to 55 basis points. That's slightly less than the guidance we gave at Capital Markets Day, but you should note, this reflects only the effective roundings [indiscernible] (00:25:08) 55.5 basis points. For 2022, as we enter a higher interest rate environment and as we see other fees return to more normalized levels, we expect the margin to increase to around 56 to 57 basis points.
Now, moving on to the business areas within our Asset Management segment, starting with private assets and alternatives. Peter has already highlighted that the strong net new business we generated within Schroders Capital more than offset small outflows in liquid alternatives. As a result, average AUM increased by 9% to £49 billion. Net operating revenue increased by 20% to £351 million, including £44 million of carried interest and performance fees, and £11 million of real estate transaction fees. This translated into a net operating revenue margin of 72 basis points.
Excluding carried interest and performance fees, the margin was 62 basis points, which is in line with last year. In 2022, we expect this to reduce due to the change in mix and the onboarding of the SWIFT real estate mandate. However, the acquisition of Greencoat later in Q2 should increase the margin back to 62 basis points for the year as a whole.
Now moving on to Solutions. Average AUM increased by 12% to £193 billion, driven by strong investment returns. This drove an increase in net operating revenue of 9% to £276 million. The net operating revenue margin was 14 basis points, in line with my previous guidance. We expect this to reduce by 1 bp in 2022 as the impact of the £43 billion of AUM we acquired through the acquisition of River and Mercantile comes through. This transaction is a testament to the continued importance of our Solutions business, the assets which have high longevity, as you've heard from Peter just now.
Next, on to our Mutual Funds business. Peter has already talked about high level of demand for mutual fund equity products we experienced throughout 2021. They sustained the strong momentum I highlighted to you at the start of the year, and you can see the impact of these flows on our annualized revenues on the chart. These flows, together with strong investment returns, resulted in average AUM increasing by 19% to £113 billion. In turn, this drove an increase in net operating revenues of 19% to £815 million.
Excluding performance fees, the net operating revenue margin for the year was 72 basis points. That's 1 bp higher than last year due to the mix impact to net new business and markets. We expect this to reduce to around 71 basis points in 2022 due to continued fee headwinds. But as ever, the impact of markets and business mix may also have an effect.
Now, finally, on to our Institutional business area. In total, net operating revenue for our Institutional business increased by 17% to £601 million. As a result of strong investment returns, average AUM increased from £143 billion to £166 billion. Those investment returns helped us generate £79 million in performance fees. Excluding those fees, the net operating revenue margin increased a touch to 31 basis points, in line with my guidance from the half year. We expect the margin to be at a similar level in 2022.
So that covers off the key movements in net operating revenue. Now let's return to the net income bridge. We generated net investment gains of £57 million. This principally comprises returns on both seed capital and the co-investments we make alongside our clients in our private asset funds. Given market returns since the start of the year, we wouldn't expect to see the same size gain in 2022.
Moving on to returns from associates and JVs. Our associates and JVs continue to perform very strongly. And this historical trend highlights the success of our investments in these businesses. Over this period, our share of profits has increased by compound annual growth rate of 28%. In 2021, the AUM of these interests increased by over 30% to £116 billion, and our share of profits increased by 48% to £75 million. That represents 11% of the group's profits as a whole, underlying their significant contribution to the group's performance.
Our existing venture with BOCOM again performed particularly strongly with our share of profit increasing to £60 million, driven by greater AUM and a shift in the mix of assets to higher quality equity products. That increasing quality is also true of Axis and contributed to an increase in the overall revenue margin for these interests, increasing from 35 basis points to 39 basis points. So, overall, our total segmental net income increased by 18% to £2.6 billion.
Now, moving on to our operating expenses, starting with compensation costs. This time last year, I talked about the investment we were making to build out two key priorities for us, UK regional wealth and China. At the time, I expected this to represent around 1% of our income and for the total compensation ratio to, therefore, increase to 45% to 46%. The strength of our financial performance this year has, however, enabled us to keep the ratio at 45%. And we expect to remain at this level for 2022.
Non-compensation costs for the year increased to £565 million. That's higher than the guidance I gave you at the half year, and they were, therefore, worth a bit more detail for me. The main driver is our decision to accelerate our cloud migration program. The majority of these costs cannot be capitalized under accounting rules. This acceleration means we will have migrated the vast majority of our estate within the next two years. Importantly, we expect the program to drive cost savings on a like-for-like basis of at least £50 million per annum from 2024.
The transition to the cloud will deliver other benefits, improving our speed to market, providing better data and insights, increasing our resilience to cyber risk, and also resulting in a very significant reduction in real world emissions. Together, these benefits will provide us with a competitive advantage. And I want to reiterate, that transition is going to take two years as we really have accelerated that program. We believe it's the right time to do that.
You've heard me say on a number of occasions that our non-comp costs as a percentage of our average AUM gives us a good indication of operational leverage. It's true that the acceleration of our cloud program has had a dampening effect. But in spite of this, the percentage has continued to fall. For 2022, we expect non-compensation costs to increase to around £620 million.
There are four key components of this. First, the variable costs that are linked to the growth of the business and AUM, and increasingly, we are changing our own non-comp cost to software as a service, Aladdin is a good example, Salesforce is another, Oracle in the cloud. So, the variable nature of those costs is increasing. Second, the acquisitions we have announced. They're substantial businesses that come with costs; along with the continued build out of our China businesses, particularly the FMC in 2022.
Third, marketing expenses. They returned to more historical levels with easing of COVID-related restrictions. But importantly, we have something to talk about. We've got a great sustainable range. We've got fantastic investment performance. We took the decision that we're going to increase and market those to generate new growth in 2022 and beyond. And finally, the year two cost of our investment in our cloud migration program.
Before I finish on non-compensation costs, it is worth noting that we expect our travel costs to remain at about half pre-COVID levels. They are not normalizing to an extent, they were basically nothing but half what they were pre-pandemic. This is, in part, highlighting our ongoing commitment to reducing our carbon emissions.
Now, let's move on to our group capital position. The sustainability of our business model has enabled us to build a strong capital position. And at the end of 2021, we had a capital surplus of £1.5 billion, but we're using some of this to invest in the three strategic acquisitions that we have already talked about. As the transactions were not complete during 2021, they're not reflected in our year-end capital position, but we expect that they will reduce our 2022 capital surplus by approximately £760 million.
So, in summary, and pulling all the key numbers together, we generated a record profit before tax and exceptional items of £836 million, an increase of 19% on the prior year. We had exceptional items of £72 million, a decrease of £20 million. These are acquisition-related, principally amortization of intangible assets. By 2022, we expect these to increase to around £100 million, mainly as a result of the three acquisitions we have already talked about. Profit after these exceptional items was £764 million The tax rate after exceptional items was 18.4%. We expect this to remain at around this level in 2022 but, as usual, the mix of our profits may affect this.
This resulted in a post-tax profit of £624 million. That represents an increase in our post-exceptional EPS of 28%. And, reflecting our progressive dividend policy, we have declared an increase in the final dividend of £0.06 per share, meaning a total dividend per share of £1.22 per share. Overall, as I said at the start, we see this as a strong set of results.
Now, back to you, Peter.
Thanks, Richard. The outlook, it's a challenging time to give a clear outlook given what's going on in the world. The world is paddling hard but we believe that the strategy has addressed many of the chinks in the armor of asset managers. But I think if I look at the primary drivers of growth historically, we've upgraded our Schroder (sic) [Schroders] Capital forecast today to £7 billion to £10 billion of growth. We've exceeded our Wealth Management growth commitment, even excluding the MPS additional assets. So, both of those, we feel very comfortable about giving a renewed commitment on those.
We know we've launched the WMC, and that will kick off later in the year. It's hard to predict how much. You will have seen Amundi, which is quite analogous business, scale of their business over the first year. So, whether that's benchmark or not, I don't know, but certainly, we believe that it's going to be meaningful in the context of our results.
We've materially changed our mutual fund range, we believe it's highly attractive, 79% of funds outperforming across the group. But importantly there, in areas where we believe there is fast flowing water. That positioning of asset management business in the fast flowing water is particularly going to be helpful with Schroders Solutions. We believe and already seeing a good growth of the pipeline there.
So, the underlying drivers of the business are all looking positive. And then there's a but, the macro environment. And that's the challenging piece, is to try and reflect how is what's going on today, higher energy prices, higher inflation, a redrawing of geopolitical risk, going to impact on markets. Everyone in this room will have their own views on that. Clearly, it's not an unimportant judgment, but we do believe that we are incredibly well-diversified, we're in the areas of fast flowing water, the resilience of the business has improved very significantly as a result of the management actions we've taken. So, we feel good about the underlying, but we can't predict the short-term.
Before I go on, in anticipation of the first question, let me answer it. Total Russian assets, including Belarus, including debt equity, amount to less than 0.1% of our total assets under management. We had, if you recall, a Russian desk in our Wealth business, we closed that – or we sold it actually rather in 2018. It felt like the right thing to do then, it feels even more right to have done it today. So, our Russian exposure is really very, very de minimis, I think, is probably the right phrase for it.
So, we're going to move to Q&A. What I would do is I'll start with questions in the room, if I may. If you could please wait for a microphone, so that people can understand fully and state your name and firm, and Richard and I will do our best to answer your questions.
Good morning. It's Hubert Lam from Bank of America. I've got three questions. Firstly, on WMC. I know, Peter, you mentioned that. But what should be our expectations for flows near term and medium term? Basically this is brand new so all the gross flows you'll be getting will be net. So, theoretically, it could be quite good for this year. I'm just wondering how should we think about that. And also, can you remind us on the medium-term guidance in terms of assets or flows for WMC? That would be great.
Second question is on ESG. I think this the first time you've disclosed your ESG flow numbers and asset numbers. So, you've got £5.5 billion – £5.7 billion for last year. What are your expectations for this year? Do you expect it to be at least the same amount? And also, like, how much of that is really net flows? Because I assume some of that will also come from – come out of your non-ESG assets. So, maybe the net number, excluding the outflows [ph] you lack in the (00:40:32) non-ESG would be a lower number. Just wondering how we should think about that.
And lastly, on M&A. I guess performance surplus capital is probably closer to about £700 million now, if you include the deals that you're going to be paying for. How should we think about deals going forward? You did a bevy of deals at the end of last year. Are you going to kind of sit tight for the time being? Or are you still hungry to do deals, even though your surplus is much lower now? Thanks.
Hubert, thanks. Richard, do you want to kick off on guidance for WMC?
Hubert, no, we don't normally get drawn in terms of giving too much guidance on flows. I know we changed our tune slightly in the Capital Market Days for wealth and private assets, but historically we've never really guided to what we expect in such a short period of time. Now, Peter, referred to – this business is very similar to the WMC launched by Amundi about a year ago. And you would have seen what they delivered.
€11 billion, I think over 15 months was the number.
Yeah. I think that's almost the best guidance I can give you. It's difficult that it doesn't start until April. I think when we sit here at the half year, we can talk about how the first few months has progressed and we'll be in a much better position to give you a more definitive view of how the first few months of trading has risen.
Yeah. We're not trying to be – we don't know. Obviously, we've done it because we think it's a significant new business. We've got a great partner who's been very good at raising funds in the FMC, but let's wait and see.
So, just on ESG, we set out the £5.7 billion. I mean, that's what – and if you like the Article 8 and 9 definition of it. Obviously it doesn't include things like what we're doing in private markets, it doesn't include what was going on in BlueOrchard, obviously, it doesn't include Greencoat. But I think you'd – it's very much a narrow mutual fund answer to the question. I think your bigger point though is that, if you think about mutual fund wealth, the Article 6, we increasingly going to see a stranded assets, but we're not going to see flows into Article 6 funds. But the new world is all going to be people want – we've seen it with many European distributors saying, if you haven't got an Article 8 or 9 equivalent, then they'll move on and get it from somewhere else. They can't be seen to be allocating to Article 6.
So, I think that it's going to be quite hard to underpin the underlying – the clear trend. But what we are seeing is that we've got 15 new funds planned in that area, we now got choice for every major area that people want to allocate. So, if you want – previously want to go into global equities, you can now go into global sustainable growth, global sustainable income, global sustainable values. So, there's a full range.
And our view is that we need the whole business to be capable of delivering across the piece. So, in three years' time, we're not talking about ESG. It's just everything is there. And that's why we've changed everything to align to it. So, your point is exactly right. Really hard to predict but it will be increasingly dominant in our flows going forward because we're going to see a run-off on the other side of the book.
On M&A, so, we – given the timing of the last two transactions toward the back end of the year and they were both bigger than the average transactions we've done in the past, plus [ph] can (00:44:14), we're very focused on the implementation of those. So, the pipeline is quite quiet at the moment. I think it's – we've always been driven by finding really high quality businesses, whether they're good cultural alignment and it's really hard to predict when they become available.
So, we're not active at the moment but we do believe that we've – if we look back at the track record of the businesses we've bought, we haven't bought a bad one. We've seen really good follow-on growth from all of them, and that's been a really important part of creating a new set of DNA in the firm. So, we're alive to it but should you expect it in the next – in the coming months, no.
Perhaps, Hubert, I can go back to WMC. And I don't want my answer to sound like we don't have confidence in it. We're very excited by the opportunity. We've invested a lot of money. The business is pretty up-next. We've built the business. It's staffed up. And we think it's a really exciting opportunity for the – over the next five years.
And we're very early as well. From a market perspective, this is – there's probably, I think, three of these in existence, that sort of thing. So, there isn't really much precedent but it feels as if it's the right – yeah, a lot of fast flowing water in that segment and backed by regulation.
Can we go to the next question?
Morning. Mandeep Jagpal, RBC Capital Markets. Thank you for the presentation and taking my questions. First one is just on the new target for Schroders Capital. I think you said they were £8 billion to £10 billion. I think previous target was £5 billion to £8 billion?
Yeah, £7 billion to £10 billion, I meant to say. [indiscernible] (00:46:07) £7 billion to £10 billion is the new target. [indiscernible]
(00:46:08) Sorry, yeah. I was wondering what the moving parts there were between the old guidance and the new guidance, the old Greencoat, were there other moving parts in there?
Sorry, second question is just on Solvency II reform. So, sticking with Private Assets, last week the UK Government announced more flexibility in the matching adjustment for – within Solvency II. Do you think this will increase demand for illiquid assets from your life insurance clients over time? And could you further upgrade to your target for Private Asset?
And then, final question is just on ESG. I think you mentioned last year that you were targeting 75% of funds in Article 8 or 9. I was wondering if that was achieved or how the expectations progressed since then?
Yeah. So, what we haven't done is we haven't broken out the £7 billion to £10 billion in private markets but our thinking is that it should be a £2 billion addition for Greencoat. We haven't under – we have – what we're not doing is increasing the underlying thinking particularly, so it's more a reflection of the fact we bought the Greencoat business. But I have to say that, from a run rate basis, the fact that we were able to do £7.5 billion, £7.4 billion last year with £2.5 billion of dry powder, it did make the old target look comfortable.
I think we're slightly early in the build out of our Solutions business to change our guidance on that. But it's fair to say that we've invested very heavily in bringing – in how we bring those products together. So it's something that we are increasingly confident about the strength of that business, I think it's probably the first thing. But we're not going beyond £7 billion to £10 billion at this stage.
Your point on the matching adjustment for Solvency II is absolutely spot on. I mean, it was designed by the British Government to [indiscernible] (00:48:12) to try and drive more risk assets into insurance businesses, and that's for very good economic reasons but also good for policyholders. And I think the inevitability will be that you'll see more in private markets, and that's got to be a good thing.
I think the other thing we haven't spoken much about is that, if you think about the average UK DC fund in the UK is not participating at all in the real strength that we have. So, take our life sciences industries, which are full of brilliant discoveries, more Nobel laureates than anything else, and yet our UK market is not reflective of that; and our DC funds are not getting exposure to private markets.
I think you should expect, I would hope, that there will be changes that enable more of those assets to be channeled into those attractive private companies that they're not yet, and I think that's something we feel really strongly about. The UK savers to benefit from – the scientific achievements, the fintech businesses in the UK, you've got to have a flow of capital coming from DC. So, I think that's the other potential change that will come on top of Solvency II that sees more growth in there.
I don't have the exact number on ESG. We certainly made a huge amount of progress. Whether we're at 75%, I'm not – we can come back to you on that. But if you think about the pipeline we've got coming through of new launches as well, the momentum there is very significant, indeed.
Any more questions in the room? I can't see who's online, but very happy to take questions from online. I don't know how we do the choreography of this, though. Okay, right, thank you.
If you're online and have a question, please raise your hand. We've got a question from Haley Tam. So, Haley, please unmute yourself, restate your name and the organization you're from before asking your question.
Good morning. It's Hayley Tam from Credit Suisse. Congratulations on a strong set of results and thanks for taking the questions. I had a couple, please. One is a follow-up on the Private Assets, the new target of £7 billion to £10 billion. I guess, I would observe £2 billion seems like a big change on a £6.8 billion acquisition. So, I guess, any comment you can give us there would be appreciated. But also, Richard, I think you indicated Greencoat earns a much higher revenue margin than the rest of that business. So, help us understand how the mix might affect your margin progression longer term. Could you help us with what the margin actually might be at Greencoat?
And the second question, just in terms of costs. Again, thank you for the clear guidance on the non-comp costs. Could you give us any idea of how much of that £620 million is variable linked to AUM as you mentioned, and also how much of the increase from £597 million is actually discretionary that you potentially could hold back if market conditions actually required it?
And if I'll be cheeky, a third question on sustainability and impact. Is there any more color you can give us on exactly how you've implemented Articles 8 and 9 for existing funds that you've converted? I guess, I'm really just trying to understand that process and understand how confident you are you'll be protected against any sort of future greenwashing risks, which is obviously – was a hot topic until about 10 days ago. Thank you.
Thanks, Haley, and thanks for your comments. Let me – so, just on Greencoat, you're right insofar as for a £6.8 billion business – actually, the prior year, they'd grown by £1.9 billion of assets, if I remember right, of that order, so it's not an unachievable number. But I think the bigger point here is that Greencoat has moved from being predominantly UK and Ireland into doing much more in Europe and the US, and we see that as a very significant accelerating factor.
And clearly, part of that thinking was Schroders provides the resource to expand our capability from sort of a UK investment trust background to a much more – a broader sources of capital, but also broader sources of wind farms and solar. So, those build-outs in the Europe and the US are underpinning our confidence in accelerating that growth. And then, obviously, Solvency II is a bit of icing on the cake.
Richard, do you want to take the points on revenue margin?
Yeah, on revenue margins, again, Haley, we don't like talking about margins as subcomponents of business areas. It's hard enough giving guidance on a business area as a whole. What I'm confident about is, with an acquisition towards the end of April, we will improve the average margin enjoyed by the business area by about 1 basis point.
Projecting forward, you can see that going another basis point, but it's difficult looking out that far in terms of the competitiveness in marketplace and the relative mix of what's driving new business in 2023. But all things being equal, it is no doubt true that Greencoat is a slightly higher-margin business and will have a small incremental improvement factor.
In terms of the question on non-comp and how much is variable, it is increasing. [ph] And SIMNA is (00:54:02) very variable. Aladdin is charged as a percentage of AUM and others are sort of softly linked. So, I'm not being evasive, but it's difficult to be precise. But I would say, £100 million of that number is increasingly very correlated to the AUM we're running.
On Articles 8 and 9, Haley, it's a really, really important question for us. I mean, there's not a day goes by, as you say, until 10 days ago, where you couldn't open the paper and say, this is going to be a source of legal action; and that's the one thing that we absolutely don't want. So, we've invested very heavily in our own data, and we've done it from a data-led perspective. And you'll be aware that we've got a proprietary tool, SustainEx, which we believe is as good as it gets.
We've had 20-odd data scientists working to make sure that our data is state-of-the-art, and we can demonstrate from first principles that the SustainEx goals of these business and funds exceeds that of their benchmarks. And I think that's been a really important validation point as we've audited the process to make sure that what we're doing is, A, clearly auditable; but B, backed by data rather than hand-waving, because we do believe that there is – this is a difficult area and people's views differ, so you've got to get – be able to get back to underlying data.
And also, you've got to be able to demonstrate the engagements. And one of the things I've set out on the chart was 2,000 engagements; we've significantly grown our engagement team so that we're able to work with businesses, A, on what they're doing; but B, to get more data. And I think that – and joining a number of coalitions and sponsoring quite a lot of change in this area has been important. So, we feel very comfortable about the position we're in, and we've independently verified the integration into our teams to make sure that we're on top of the – what we say we're doing is actually what we are doing.
The – one of Haley's final questions was in terms of avoidable non-comp costs. Ultimately, we can avoid a lot, but it would damage our business. If we're halfway through a major program that's going to – like the cloud migration that's going to deliver £50 million of savings every year from 2024 onwards, yes, we could stop that program but it would seem absurd to cut that investment, given it has a very quick payback period.
I think marketing cost is the one key variable that we, yeah, move up and down depending on the market conditions. It's moved from £33 million in 2020 to £40 million in 2021. Now, some of that we need to do but, clearly, that is more discretionary in nature. Have we got something good to market? Can we see the return on investment? We certainly made that a very – a key decision at the halfway stage last year. We had great investment performance. We had – sustainability was increasingly important. Private Assets, we wanted to rebrand, that's delivering future revenue growth. So, we made the decision to increase our marketing spend back to pre-pandemic norms. But clearly, we can move that back down or we could increase investment further, depending on market conditions.
I think that's the external spend. We obviously spent a lot more on internally-generated content, et cetera.
Yeah.
Next question?
Next question's from Luke Mason. Luke, please unmute yourself, state your name – restate your name and the organization before asking your question.
Yeah. Thank you. It's Luke Mason from BNP Paribas Exane. Just a few questions. Firstly, on the Private Assets target, the £7 billion to £10 billion. I'm just wondering if you could comment, would you see any impact from markets or macro on that type of target or do you think it's pretty set in stone? I mean, could you talk through the pipeline of some of the larger fundraisings within that, for example?
Secondly, just on the WMC business, could you quantify the costs made to date in that business or how we should think about a timeline to profitability?
And then, thirdly, just on Schroders Personal Wealth, so flows have turned positive for the year and you talked about the increasing confidence in that business. I'm just wondering if you're seeing any change in the competitive environment or some of the – some of the D2C players coming out with robo-advisor type offerings? I just wonder if you could comment on that. Thank you.
Thanks, Luke. So, the – I think the Private Asset target is – clearly, if the world stops completely, then, yes, there's an issue. But what we've – the more powerful trend is for clients who need to re-up, for clients who need to rebalancing their portfolios. And many, many of our programs that we've got are sustained multi-year programs, so I think that that is much more resilient target than perhaps predicting mutual fund flows from one month to the next.
The other benefit we're having is that we've gone – as we've launched a lot of organic strategies, you go from Fund I, which, by definition, is £100 million, £200 million; to Fund II, which might be £700 million or £800 million; to Fund III, which you're able to raise a couple of billion. And in many strategies, we're at Fund III. So the fund – so for – in infrastructure debt, for example, we've got Fund III coming. Fund II actually got to be the largest infra debt fund in Europe, Julie II. But Julie III, we think, will be significantly larger. FOCUS II, which is securitized fund, again, was a significant fund but we think Fund III, which is coming this year, will be larger. And in Private Equity, there's some good programs coming through there, and also some good separate account business as well for – on the pension fund world.
So I think, on balance, Luke, we're comfortable because, as our business matures, we're [ph] riding up that curve (01:00:32). And if we hit the targets that we'll get to, we'll get to being a top 10 player in Europe this year, which will be a really nice achievement. So, we're moving through quite quickly. The WMC, I mean, I think in terms of profitability, we [indiscernible] (01:00:51) to disclose on there.
So, in terms of profitability, obviously, it depends on – we have no revenue yet. Yeah, so we haven't won any funds. We haven't launched those yet but I would anticipate it's going to be around the breakeven in 2022. And if it continues to grow, you should expect to see a strong profit contribution in 2023.
Yeah.
But broadly flat in 2022.
I think Hubert's point that net equals gross is an important consideration in terms of the build-out of the profit.
But the reason why it's flat in 2022 is revenues haven't started and it's pretty built-out in terms of cost base. It's got premises. It's had all the people.
And it's got four months of not trading.
Yeah.
SPW – I actually think that, in SPW, the trends are – you're right insofar as there's a lot of new launches but we're not seeing the impact on the business because the state of the UK advice market is still – there is still a vast number of people who are not yet advised, and there is a great deal one can do in terms of taking them through that advice journey and improving the outcomes that they have as a result. So, I think that we observed – and there's quite a lot of activity digitally, there's been an awful lot of M&A of people.
We were beneficiaries of selling our Nutmeg business to JPMorgan last year, or the stake we had in it. We observed other businesses changing hands. But I think the advice-led business in the UK has got very good growth. We've seen that from SJP's figures and we're growing the market. The fact that we've got the Lloyds referrals and Australia's brand and product range, I think, is very helpful. So, the key thing now is to turn those referrals and increase the conversion rate of meetings, which is exactly what is going on at the moment. So, I think we feel comfortable about the increase in growth rate there.
Luke, thank you. Any more questions?
The next question is from David McCann. David, please unmute yourself, restate your name and your organization before asking a question.
Yeah. Good morning. It's David McCann from Numis. Just one on the non-voting shares. I mean, you've probably observed, they're now close to a 4% discount to your voting shares. Just wondered if the company had any intentions to try and do anything about that? I mean, it would seem to me that you still have decent amount of surplus capital left [indiscernible] (01:03:29) be basically pretty accretive transaction you could do there with basically zero execution risk, given it's your own business that you already know. So just wondered if you have any thoughts on anything you can do to close that gap?
Is that your – the only question, David?
That's the only question. Thank you.
Okay. Brilliant. Thanks. And thanks for that. Yes, it is – it's been – discounts moved out quite a lot during this – in this market turmoil and it's something that we do keep an eye on but we're not announcing, at the moment, any plans specifically. And obviously, this wouldn't be the appropriate audience to announce it to. But we do keep it under review and always done. Next question?
If you're online and have a question, please raise your hand.
Great. Well, thank you, everybody. I'm very conscious that it's been a full hour. So, thanks for all your questions. Thanks for those who attended in person and all the questions, and look forward to seeing you next time. Thank you very much.
Thank you.