Janus Henderson Group PLC (JHG) 2006 Q2 法說會逐字稿

Okay. We might start. Good morning, everyone. Welcome to Henderson's 2006 half-year results presentation. Those of you listening in by phone or on the website can hear me clearly. In addition to the information we are presenting today, there is also more detail in the stock exchange announcement and also in the appendix 4-D which we launched earlier today, and all of those documents are on the Henderson website, www.Henderson.com.

With me in the presentation today is Toby Hiscock, our CFO, and James Darkins, who runs our property business. I will make a number of initial comments, after which Toby will go through the financials in more detail. I will then cover key business trends and the outlook for the rest of 2006. If you would not mind, if we can hold questions until the end, that would be terrific.

So starting with the headlines of the results, I think overall we think the business is traveling pretty well. Our strategy of focusing on high margin products continues to bear fruit. So helped by good flows into those products, group profits from continuing operations rose by 31% to 46.2 million pounds. Within that number, profits for Henderson Global Investors rose by 23% to 46.6 million pounds.

We also improved cost-efficiency with a 1.4% reduction in Henderson Global Investors cost to income ratio to 69.2% compared to the first half of 2005. Assets under management were lower at 63.1 billion pounds, and we will go into more detail on that later.

But importantly, flows into high margin product were very strong at 2 billion pounds of net inflow. That was a very important driver of revenues and margins over the period. Other key items (technical difficulty)-- slide. As you know after extended discussions with Pearl recently, we announced a new set of investment management agreements with that client, and those agreements (technical difficulty)-- revenues for Henderson, and again we provided more detail on that at the end of June.

Moving on, the plans to return 200 million pounds of capital to shareholders are well advanced, and subject to shareholder and UK Court approval, that return will take place in October. Also as reflected at the end of June (technical difficulty)-- in conjunction with that capital return, we have agreed additional pension contributions with our pension trustees totaling 80 million pounds over the next three years. We also completed the sale of Towry Law UK, and we are paying an interim dividend of .88 pence per player or equivalent, which will also take place in October.

So those are the headlines of the numbers. I will now get Toby to go through the financials in more detail. So, Toby, over to you.

Okay. Thanks, Roger. So I will start with the group as a whole. The group result includes higher revenues and profits from Henderson Global Investors, together with higher returns on corporate cash. I will say more about Henderson Global Investors in a moment. But with regard to corporate, costs were marginally lower in the first half of this year, even though one-off legal and professional expenses inflated these costs by 2 million pounds. The one-off expenses relate to our discussions with Pearl and also the potential acquisition we reviewed earlier in the year. We expect corporate costs of approximately 12 million pounds for the full year, marginally down on 2005.

The income earned on corporate cash increased 43% to 6.6 million pounds in the first half of this year. The increase was largely due to interest earned on cash retained after the sale of the Life Services business. Once we complete the planned capital return in October, the income earned on corporate cash will fall, and therefore, income expected in the second half of this year will be lower than in the first half.

Discontinued operations comprised Towry Law UK, the Life Services business and Towry Law International. The 2 million pound loss before tax consists of the profit on disposal of Towry Law UK, offset by the crystallization of warranty claims under the sale agreement for Life Services. The first half 2006 income tax charge for the group included an 8.6 million pound charge for continuing operations, representing an effective tax of 18.6%. That is similar to the first half of '05, but slightly above the annualized rate in full-year 2005.

The effective tax rate for the group over the first half of this year was 19.7%. We still expect the effective tax rate for continuing operations to increase to the expected rates, in other words 30%, by approximately 2009.

So, on to Henderson Global Investors. Management fee income increased by 14% to 108.4 million pounds in the first half of the year. This was primarily a result of improved margins and positive market effects. The largest contributors to this increase included mutual, property and Absolute Return Funds. Transaction fees were broadly in line with the first half of last year, whereas performance fees rose strongly, up 46% on the first half 2005. These fees continue to come from a range of products, and the largest contributors in the first half of this year were Absolute Return property and Horizon Funds. So that takes us to total fee income for Henderson Global Investors during the first half of this year 145.2 million pounds, 16% up on the comparative period of last year.

Investment income shows an increase of 43% on the first half of 2005 to 6.3 million pounds due to good returns from seed investments in Henderson products and returns on cash balances in Henderson Global Investors.

I will talk about expenses on the next slide. But the higher management performance fees income in Henderson Global Investors during the first half of this year drove an increase in its average fee margins with total management and net margins all up on prior periods.

Moving to costs, Henderson Global Investors' operating expenses increased by 15% from the first-half 2005 to 103.5 million pounds due to higher staff expenses and IT costs. Staff expenses increased by 25%, almost entirely due to provisions relating to variable remunerations reflecting improved operational performance. IT expenditure increased by 54%, mostly due to the cost of upgrading our derivatives trading platform. These increases were partly offset by savings in investment administration and other costs, but importantly the increase in operating expenses was more than offset by the increase in total revenues. And this resulted in an improvement in Henderson Global Investors cost to income ratio from 70.6% in the first half of 2005 to 69.2%. And for the full year of 2006, assuming benign markets, we have adjusted our cost to income ratio target for Henderson Global Investors from the previously stated 74% to 73% before any one-off costs. The higher figure for the full-year target versus the first-half actual is due to the phasing of performance fees, most of which fall into the first half.

In 2007 we expect to improve further on the Henderson Global Investors cost to income ratio, and our current analysis suggests that we could achieve a full-year ratio of 70% through a combination of profitable revenue growth and careful cost control. In particular, we will examine potential efficiency improvements and their associated costs in the second half of 2006.

This slide contains some more detail on staff costs. It shows the historical trend in fixed and variable staff costs versus total income. Fixed staff costs have remained broadly flat and as a percentage of total staff costs have, in fact, declined. Variable staff costs have increased over the last three periods, in line with increased income.

Moving to the balance sheet, this remained strong with good liquidity, no gearing and appropriate provisions. As already mentioned, we plan to return approximately 200 million pounds of surplus capital later this year by way of a capital reduction. This is the same method we used after the sale of Life Services. The proposal being put to shareholders on the 31st of August is to cancel 22% of issued share capital in return for a cash payment. Each shareholder will receive 78 pence or equivalent per share canceled. If we receive shareholder approval, we will also need UK Court approval. And if all goes according to the expected timetable, we will return the surplus capital before the end of October.

In addition, we are looking at the possibility of a further capital return in 2007 subject to completing a number of outstanding actions, including those highlighted on this slide. Initial indications are that another return in the region of 150 to 200 million pounds could be achievable, further improving Company earnings per share and returns on equity.

On this slide, you will see the key movements in equity during the period, including surplus capital. The regulatory capital balance is reduced by 15 million pounds, 5 million pounds of which relates to the sale of Towry Law UK and 10 million pounds relates to efficiency. Warranty and indemnity exposures are reduced by 12 million pounds following the recent payment to Pearl and final settlement of the non tax-related claims under the sale agreement. The balance of 38 million pounds here is considered sufficient for any potential tax-related claims from Pearl and also for warranties and indemnities relating to the sale of Towry Law UK.

Surplus capital at the end of June stood at 308 million pounds, an increase of 87 million pounds on the last year-end. First-half profits, other reserve movements and the proceeds from Towry Law UK have all contributed to the increase. 210 million pounds of the surplus will be returned to shareholders in October of this year. That is 200 million by way of a capital return and 10 million pounds by way of an interim dividend. 40 million pounds of the surplus will be used in the second half of this year to seed new Henderson Global Investors products, in line with our policy of maintaining a balanced portfolio of corporate investments. And a further 40 million pounds of the surplus has been earmarked to part fund the additional Pension Scheme contributions that Roger referred to earlier and which I will say a little more about in a moment.

Cash equivalents amounted to 550 million pounds at the end of June. Virtually all of this is allocated to regulatory and working capital provisions and other commitments. Regulatory and working capital is cash funded to an amount of 80 million pounds. The balance of this capital, that is 30 million pounds, is funded by other assets. The bulk of provisions relate to the settlement of Legacy product and selling issues in Towry Law International, which we expect to pay out this year and early next. Retirement benefit obligations relate to the agreement we have reached with the Henderson Group Pension Scheme Trustees in conjunction with the planned return to capital to contribute 80 million pounds in excess of regular contributions to the staff Pension Scheme over the next two years. This will help strengthen the scheme's mortality provisions and reorientate its investment strategy to a liability-driven investment approach. The additional contribution will be made in three installments -- 40 million pounds in October of this year, already provided for under IAS principles on our June balance sheet and another 20 million pounds in each of October 2007 and October 2008, which I referred to on the previous slide.

The pensions escrow balance relates to the sale of Life Services, and most of that is being drawn by the whole group trustees over the next two years. Warranties and indemnities and seed capital commitments have been covered already, leaving the 210 million pounds to return to shareholders in October of this year.

Now I will hand back to Roger.

I will now just spend a few minutes talking about some of the key building blocks of the business, which are investment performance, fund flows and margins, and I will say a little bit about how we see the rest of 2006.

On performance I think against a background of really unsettled market conditions, investment results recently have overall been broadly satisfactory. So, on the top of this slide, you can see equities over the last year, 72% of funds beat their benchmark and a similar number over three years. Fixed interest clearly still has work to do. But we made a lot of new hires last year, and I'm confident that they will deliver improved results. Property, very good again over one and three years, a very good long-term track record there now.

Encouraging are the strongest areas of performance, if you look at the detail, have been the high margin businesses including mutual funds, hedge funds and property. I will show more detail on those in a moment. By contrast, institutional performance has been lagging, and inevitably even the new hires we have made there cannot guarantee an immediate turn in performance. There are quality individuals with excellent long-term track records, and importantly they are already winning the confidence of clients and consultants, and the changes we have made to the lineup have already started to result in product upgrades from the major consultants in a number of different areas. Obviously we also continue to win a number of investment rewards recognizing Henderson's products and capabilities as excellent.

On the detail of investment performance, we have shown on this site a range of different investment products. The most important message here is that the best performance is in the high margin business areas. So, indeed, that was one of the drivers of the 2 billion pound inflow into those high margin products. So if you look down the slide, by and large mutual fund performance in our Horizon range that we sell in Europe, US mutual funds in hedge and property have all been really very very strong.

By contrast, institutional performance, right at the bottom of the slide, has remained weak both in core equity and fixed-income. Now, as I said, we have had positive feedback from the consultants to the new hires, and certainly when this performance turns, that positive feedback I think augurs very well to fund flows in the future.

Another measure of success, of course, or the investment success is the performance fees which we earn on the funds that we run, and here we've had a very good first half. Performance fees in total are 24.2 million pounds in the first half compared to 16.6 million pounds in the first half of last year. And as in previous periods, the mix of those fees has changed, and this year hedge funds and property funds have been the key contributors.

What you can also see on this slide is the number of funds on the right-hand side on which we are actually earning a performance fee is also increasing. And importantly also, and not on this slide, the number of funds on which we have an opportunity to earn a performance fees again is increasing. Those increases and the diversity of funds on which we can earn performance fees to give us a lot confidence that in aggregate performance fees is going to remain an important feature of the revenue line in the future.

Notwithstanding that positive view of performance, obviously like any fund management group we like to see a bedrock of recurring revenues from management fees. And here we show that in addition to the success we have had with performance fees, which is the green line at the bottom, recurring management fees have increased (technical difficulty)-- total income actually have remained fairly stable at about 80% of the total.

Turning now to fund flows. This slide really shows the key changes, and I will just walk through the different numbers there. So we started the year with 67.7 billion of assets under management. There is a small market effect but not particularly (technical difficulty)-- and actually the important items are as follows. So, first, 2.9 billion of outflows in the institutional book. I have talked about that on many occasions, the shift from balance to specialists and so on. Obviously I would prefer it was not a negative number, but (technical difficulty)-- management companies, which had a significant book of balanced business.

There is also lower margin business, and that trend in outflows has started to slow. So that 2.9 billion outflow compares with 4.3 billion pounds out in the first half of last year and 4.4 billion out in the second half of last year.

Secondly, 2 billion of inflows in high margin business, I will talk a bit more about that in a second. Thirdly, 1.5 billion out from Pearl. That business is in runoff, as you know. There is not much we can do about that. And 2.4 billion out, finally, for a passive mandate for Virgin Money, which we flagged when we so;d that business back in 2004. We flagged it again in May of this year. Very low margin business, about 4 basis points. So obviously not significant in a P&L account sense, and it is obviously a non-recurring item, that outflow.

Just a bit more detail on some of those issues. So starting with the 2 billion inflow into high margin products, that compares to about a 300 million pound net inflow in the first half of last year. And the key drivers are very much hedge funds, mutual funds and property. Flows (technical difficulty)-- Sterling in the first half. That has taken that business to 3 billion of assets in total in hedge, which again is now starting to become reasonably significant for us, and we've got more launches planned in that area for Q4 of this year and Q1 2007.

Mutual fund sales, 0.8 billion, positive net. They are particularly good in Europe and North America. By contrast the UK was relatively flat. Property continues to be a great business for us. In the first half, we invested .9 billion of assets into the market. That is a point at which we actually include them in assets under management because we do not earn a fee until the money is actually invested. But despite that investment program, new client commitments mean that we have still got around 2.5 billion of assets to invest in property on which we can then earn a fee once that money has been invested. And James Darkins might talk a little bit more about that in a second when we move into Q&A.

On outflows, obviously Virgin Money will not reoccur. Pearl outflows were in line with our expectations as the book runs off. And in neither case, Virgin Money nor Pearl was the revenue impact material. The future trend as regards Pearl and outflows is harder to predict because the new investment management agreements do give Pearl freedom of movement of assets, and to a degree, it would be surprising if they did not utilize that freedom at least to some extent. However, as you know based on the new investment management agreements, we do have certainty of revenues regardless of what they do with assets under management and regardless of market movements. So we think the revenues will run down gradually over the next nine years in line with our original expectations.

And finally, we do expect institutional outflows to slow. I do actually think there will be an outflow in the second half, but I think the trend is now very much downwards. The critical thing, though, very much to make sure we maintain momentum in those high margin products to drive the revenue and profit line.

Finally, in terms of key drivers, margin (technical difficulty)-- you are probably quite familiar with these triangles now, which is one way in which we are trying to show the (technical difficulty)-- on the overall business of what is happening in the high margin areas in products. They show how the composition of our P&L account is changing. So revenues from high margin business is now 70% of total revenue but only 29% of assets under management. That compares to 58% of revenue and 21% of assets under management a year ago, so becoming more more significant. By contrast, our more generalist products -- it does not mean they are not important -- they are, but more generalist products, about 70% of assets under management but 30% only of total revenues.

The future growth of Henderson lies very much in driving those high margin business areas, actually in all channels, not just retail, but in the institutional channel as well.

In terms of the outlook for the rest of the year and into '07, we start as always with investment performance. It is really important that we build on the good performance we have had in those high margin products -- mutual funds, hedge and property -- and clearly we need to improve our performance in those core institutional areas.

As regards flows, there is no reason we cannot add further assets in the second half in high margin products, although I would think based upon the trends we have seen so far really right across Europe, that mutual funds sales may well be slower in the second half than they were in the first half. That is probably an industry phenomenon, not just Henderson.

As regards profitability, as you heard from Toby, we expect to improve further on the cost to income ratio in 2006 and achieve a 73% ratio for this year and for next year a 70% cost to income ratio achievable through further revenue growth and careful control of costs.

On the balance sheet, obviously a return to 200 million pounds to shareholders this year hopefully by the end of October, paying an interim dividend of about .88 pence per share at the same time and then a further capital return in 2007 of around 150 to 200 million pounds depending on full clarity on the new capital requirements directive and the other points that Toby referred to.

So overall we think very much that the business is on the right track. We have got further opportunities to grow our high margin businesses, we've got further opportunities to increase profitability, and we've got further opportunities on capital planning. (technical difficulty)-- pretty confident about the future.

So that is the end of the formal presentation. We will now take questions both here in the room and on the telephone. So over to you. If you would not mind, waiting for the microphone so everybody can hear that would be great.

++ q-and-a

A couple of questions. One, on the performance fees, the last couple of years there has been a clear a sort of half on half to seasonality to it, and I wondered whether there was any reason for that, or whether it is just a function of markets?

And the other question I wanted was on property. Some idea of the timing of investment of that 2.5 billion and how that pipeline compares to, say, the end of the year?

Yes, on the performance fees, there is a first-half seasonal bias, and I think we expect that to be the case in this year as in previous years. And the main reason is simply that the year-ends of the hedge funds fall more in the first half than they do in the second half. Not just the hedge funds, actually some of the other products as well. So that is what drives that.

On property that is probably a nice key to let James talk a little bit about that business and pick up the questions there about how good funds have been invested and so on. So why don't you spend a few minutes on that?

I will deal with that specific question first. In terms of the 2.5 billion that Roger referred to, we are anticipating that we will invest that at the current rate, so that was the 900 million in the first half of this year. So that we think is a reasonable rate of future investment and, indeed, probably a reasonable rate of sort of future growth for our business.

What I thought I would do is just give you a sort of brief introduction to property business. Henderson has property businesses in US, Asia and here in Europe as well. But what I would really like to do is focus on our UK and European business because that has been through a very significant transformation over the last five, six-year period. If you were to look back five or six years, you would have seen a property business within Henderson that was dominated by our former internal lide funds that had all of its assets in the UK. If you look at our business as it stands here today, you will see a fully fledged pan-European property fund manager dominated by external third-party clients with offices throughout Europe and with a good track record for performance amongst its clients. I would like a sort of bring that alive for you by just giving you a few metrics around that transformation that we have been through.

So, say, going back six or so years, you would have seen Henderson just having one (technical difficulty)-- based here in London. If you look at us today, as well as London, we have seven other offices across Europe, Paris, Luxembourg, Amsterdam, Hamburg, Frankfurt, Vienna, Milan. In terms of people back in 2002, we had 84 people in our European property business. Now we have 151 at the half year. 20% of those are now in the EU, but probably about a third of our people and property are working on Continental European business because we centralize a lot of functions here in London.

In terms of assets under management, looking at '02 to the end of the first half of this year, our assets under management have gone from 4.7 billion Sterling to 6.7 billion. That is an increase of 42%, but actually that hides the true growth that has been going on. Because over that period, the former life funds deallocated about 1.3 billion to property. So our underlying growth of new business has been about 70% over that period since 2002. And the life funds as a consequence have gone from '02 to being (technical difficulty) of our property business to 6% of our property business as we stand here today. In terms of European assets under management in Europe, they have gone from 0 to 15%, and clearly Roger referred to the 2.5 billion that we have to invest. The bulk of that 2.5 will be invested in continental Europe as opposed to the EU.

So as well as a change in the kind of domicile and the growth factors of our business, there has also been a substantial change in the type of business that we do. So going back to 2002, about 29% of our assets under management were in pooled funds, i.e. a single fund with multiple clients in it as opposed to segregated account business. So it was 29%. Now it is 74% of our assets under management are in pooled funds. In terms of number of funds, well, we've gone from a tiny handful when I first started back to 23 funds, 11 of which have a European mandate in them.

Now that transformation in our business has had sort of two benefits for Henderson. One is that we have grown and diversified our client base. So when I started in my current role in 2001 we had less than 20 clients in the property business. We now have over 160 clients. I guess one of the things that has been very satisfying for us is that a number of our blue-chip clients have chosen Henderson to be the first company they have invested with when they have gone to third-party products as opposed to internal investing. So clients like (indiscernible) BNP have chosen us to be the first time they have invested outside of internally managed property funds. And that has come through in recognition. Last year the German asset consultant, [Ferry], did a survey amongst clients, and it voted [Verbank] Henderson, our joint venture in Germany, to be the number one KEG, property KEG within Germany, and we also received an award from our community of this year voted for by their leadership as the best investment, property investment manager in Europe. That is clearly a function of our investment performance, which Roger referred to. Over 90% of our assets under management have met or exceeded their benchmarks in the last two years, 83% over the past three years. That is a bit of very hostage to fortune delivering investment performance. So it is fair to say that as we go through our investment program at the moment, we are looking at transaction costs as we get money away for our clients of between 5% in the UK to 20% in some of the EU 15 countries. So those are big hits on investment performance, but our clients understand that because they have invested with us.

That transformation of our business has also delivered improved financial performance. So if you look back to 2002, you will see the revenue that we were gaining on our assets under management being on average 31 basis points. If you look at our business today, it is 41.6 basis points. So we have had a 34% increase in our revenue margins, and that is on based management fees. That excludes performance fees over that period.

As far as performance fees are concerned, to the best of my memory, when I started in 2001 I think we maybe had one or two performance fees. Now 90% of our assets buy value. 77% of our funds have performance fees attached to them. So not only are our base margins -- revenue margins going up, our performance fees earning potential has gone up enormously.

As far as financial performance is concerned, we are now beginning to see improved efficiency within our business. Clearly we have had, as you have seen from the staff numbers, we have had to invest in considerable infrastructure across Europe to build our business. But we now have that infrastructure in place. We have committed capital from our clients, and we are getting it invested. So the 2.5 billion that Roger referred to represents around 10 million per annum of management fees that are locked up in that investment programs.

So, in summary, I believe we've built a very solid platform in Henderson in our pan-European property business. We have got a good reputation amongst (technical difficulty)-- business efficiencies are now beginning to come through, and our strategy is paying off for us.

I am happy to answer any other questions on property.

Can I just have a couple of questions, and then I will hand the mike over to someone else. You mentioned 6.7 billion. Was that UK and Europe? Currently because that compares to 7.3, I think it is, that is the figure that is shown overall.

Yes, the 6.7 relates to UK and Europe.

So the .6 would be effectively the rest of the world?

No, if that is the ex-US figure, it probably relates to property securities I would think.

Right, okay. And the questions on performance fees. Are your property performance fees subject to hurdle rates, or are they just absolute?

The majority of our UK funds are relatively (technical difficulty)-- fees by performance measured by [IPD]. Majority of our European funds tend to be absolute.

Thanks.

[Caroline Darr], Citigroup. Can I ask, first of all, a question on the capital return that you're talking about for '07? This was 150 to 200 million.

Now from where I see it, there might be two different components of this. One could be gearing on the balance sheet, and the second could be a return of capital if the goodwill regulations map out. Could you just split out your thinking on the 150 to 200 between those two different ones? Because if I look at, say, a gearing and you are going for, say, 7 times EBIT, I can probably get up to 150 just on gearing alone without having to use any goodwill return.

Well, as I said, the 150 to 200 is potential, and it is subject to completing a number of actions, including the gearing question and full clarity on the CRD. As a part of the CRD preparation, we have flagged the new materials this morning that we will be applying to the FSA for a waiver from consolidated supervision, which is permitted subject to strict criteria under the new CRD applications in before the end of September I think. So much to list in the immediate future.

There's absolutely no guarantee whatsoever that we will get it. Because historically where waivers have been given, they have been given to houses who have otherwise been unable to meet their Prudential capital requirements. So that is what we are doing on the goodwill question. We will just have to see where it goes.

The gearing point, we have got to do the work. We are planning to do it this half. So there are lots of questions there about ratings we might use and just doing the due diligence which is necessary. So we are not giving you a figure today on what the quantum of gearing might be. It is safe to say we are looking at -- considering prudent levels of gearing. So we don't need hundred and hundreds of millions of pounds to buy that.

I think that is the point to determine saying we want to do 150 to 200 million, we have got a financial firepower I think to do that given that we had an unleveraged balance sheet today. But we don't want to be giving out gearing versus capital splits at this stage, which is (indiscernible) work.

(multiple speakers). Yes, on the phones.

(OPERATOR INSTRUCTIONS). We appear to have no audio questions at this time. I will hand the call back to you.

Michael Long, KBW. I just wanted a quick question if you could give us any sort of guidance on how the path I guess of the tax rates going from where you are now, which is pretty low to the 30% where you think it will be in (technical difficulty)--. Is it sort of a linear sort of tax rate we're expecting to move or --?

I think Toy said before, I have hear him say many times that we are expecting it to be normalized, i.e. 30% by 2009, and it might not move in an exactly straight line between where we are today and that point. I think it's actually quite hard to be predictive of it. But I think for modeling purposes it is probably not a bad way to do it.

(multiple speakers) No, it is just that this year compared to last year has hardly changed at all.

You should still assume it is heading northwards towards a full rate in 2009.

Two quick further questions. First of all, just in terms of your balance and (indiscernible) asset mandates, can you remind us how much you have got left now?

(multiple speakers).

While Toby is just looking at that one, just in terms of BPI, you reduced your stake in that earlier this year. Did you get any profit on the sale from that?

You might deal with both of those.

That is a modest turn on the investment, which is reflected in the investment income line -- and this is global investors -- but it is not material. On the balance, I think returning to our last 3.2 billion including certain Legacy equity mandates, not a lot left to go.

Bruce Hamilton, Morgan Stanley. Just a quick question on fee margins and any pressure on your fund to fund business. I think you have launched or launching the sort of multi-manager products that access all of your hedge funds. What sort of fees do you expect to charge on that, and have you seen any change in this direction of fees or the fees you're charging on managed fund business?

Not really. I mean we've started to look at the mutual fund areas which is where theoretically the greatest pressure is because you are most in the hands of the big distributors. You know, we probably net something close to 70 basis points in the UK, around 100 basis points in Europe and then 60 basis points in the US. That sort of magnitude there is from distributors. So those really will sustain those for some time which is good.

In the hedge fund arena, the new products depending on how we started off could be between 100 and 150 basis points to us. Plus, of course, performance fees. And there, of course, I think there has been, notwithstanding what you read in the papers, actually in our experience much less pressure on margins and fees. Because actually it is not a scalable business in the same way that mutual funds is scalable. It is capacity limited. So actually we have got three or four of our hedge funds which are close to new business. So by definition you're not having any fee pressures as long as you're delivering to the clients.

I gave this as an example at our last half-year. We launched a second variant of a European fund that we have, which is the first variant was close to new business. We launched the second (technical difficulty)-- for a particular client. And whereas on the first fund, it was 150 plus 20% of the performance fees, on the second fund, it was 150 basis points plus 20% of the performance fees, and in return over 12%, it was 30% of the performance fees. So actually for a credible product that is in demand on the hedge space, if anything the pricing pressure is on the other side.

[Simone Pathe], UBS. Could you maybe give a little bit more color on your 70% cost income ratio target for next year? Just roughly how you think about it -- flows, management fee margins, costs, etc.?

Well, I'm not going to break it down into percentages, but the biggest driver of (technical difficulty)-- and that revenue growth derives from three sources -- some modest market growth assumptions, from the momentum of the business won this year and from new flows we expect to win next year. By far the biggest component of the driver is revenue growth. If we can find efficiencies in the business to supplement that, that would be great. But we are -- it is a challenging goal, but we think (technical difficulty)-- if we can get those revenue numbers moving in our direction, which they are.

BPI, I just noticed in the appendix you have got the last bullet point on the slide on BPI. Capital restructure expected the second half of 2006. I wonder what that referred to.

Yes, this is their capital restructure rather than ours. You may know that they did a rights issue a month or two ago. The capital restructuring in the second half is about them consolidating a couple of minor entities, albeit listed entities in the group, so something called (indiscernible), that (indiscernible) leading branch network is something called BPI(technical difficulty) which is the product manufacturing unit in BPI. Consolidating those entities into the main banks, there will be one listed stock going forward. And because our investment is across all three (technical difficulty)-- at the moment, then we will be participating in that consolidation exercise.

Any more? Anything on the phones now? Okay, great. Thanks for listening and turning up and have a great bank holiday weekend.