Janus Henderson Group PLC (JHG) 2008 Q2 法說會逐字稿

So, welcome to our 2008 half-year results presentation. Hopefully, those of you listening on the phone or via the website can hear this clearly. So, in addition to the information that we've got in this presentation today, there's more detail in the Stock Exchange release and in the interim report which was already lodged today. And obviously, all three documents available on the website for you to look at later.

I'm going to make a few initial comments about the results and then Toby Hiscock, our CFO, is going to cover the financials in more detail and the proposed Scheme of Arrangement which we also announced this morning. I'll talk then about business developments and our priorities for the rest of the year. And then, obviously, we'll take questions at the end, if that's all right.

So, starting with the headlines of the results. Obviously, the background to these numbers is a very different one to that which we enjoyed in the first half of last year. And in particular, the major markets have fallen by anywhere between 10% and 20% so far this year, so a much tougher background for investment management businesses. And that in turn has had a knock-on effect on investor confidence, which in due course has fed through to fund flows for the whole investment management industry, not specifically Henderson.

So, that's a pretty unpromising background but against that I think Henderson has put in a pretty resilient performance. And you can see for the Henderson Global Investors operating profit before tax pretty much unchanged, at GBP60.6m compared to just over GBP61m last year. That's partly due to the resilience in our business but also partly, obviously, due to the prompt action that we took on costs earlier in the year.

At the Group level, the profit number, at GBP50.8m, is obviously lower than GBP60.5m, but remember the big swing factor there is the swing in interest because of the debt we took on last year. The better comparison is actually the earnings per share number, which rose 12% and drove an equal improvement in the dividend per share number.

And the profit number obviously helped to drive the cost to income ratio and compared to the first half of last year we actually enjoyed almost a 6% improvement in cost to income ratio, to just under 60%, so really pleased with that outcome.

Overall AUM GBP52.6b at the end of June and I'll take you through how that changed from the start of the year when we come to fund flows. But Toby, why don't you pick up financials in more detail?

Okay. Thanks, Roger. Morning, everyone, evening to those in Australia.

So, taking a look at the Group P&L first of all. Profits for the Group before tax and non-recurring items in the first half of this year were GBP50.8m, as you saw a moment ago. After non-recurring items, the total operating profit pre-tax was lower than in the same period last year, due to non-recurring accounting gain on our investment in Banca Popolare and our past service credit in our staff pension scheme in 2007. But within the Group number Henderson delivered a similar profit to that in the first half 2007, as Roger just said, which is a good result bearing in mind the challenging market conditions that we faced.

Corporate made a loss of approximately GBP9.8m. And just breaking that down, you've got corporate costs reduced by some 18% on the same period of last year due to lower insurance and legal expenses. And we now expect corporate costs for 2008 to be approximately GBP8m. That's somewhat less than in 2007.

Corporate net interest turned negative, also as Roger mentioned, GBP5.7m in the first half of 2008. And that was due to the introduction of some debt last year and also lower cash balances following the special dividend that we paid to shareholders in October 2007. And we expect corporate net interest for the whole of 2008 to be approximately GBP11.5m. That's assuming an interest rate of 6.5% per annum.

Turning to tax. In the first half of this year, the effective tax rate for the Group before non-recurring items was 13.3% and the effective tax charge after non-recurring items was just over 12%. We expect the effective tax rate for this year to remain within our guidance of between 10% and 15%. As you know, of course, we are proposing a Scheme of Arrangement to shareholders, and if that goes to plan we should achieve an effective corporate tax rate of approximately 20% per annum with effect from 2009, and I'll say a little bit more about that shortly.

So, looking at the Henderson Global Investors profit and loss account, this slide shows the Henderson result in a bit more detail. You've got management fee income in the first half of this year at GBP119.2m, down 8% on the same period last year. This was due to weaker markets and also the absence in 2008 of make-whole management fees earned on some structured products last year. The largest contributors to management fees in the first half of 2008 included wholesale funds, Pan-European property in our institutional business.

Net fund inflows into higher margin products and also outflows from Pearl meant that the average management fee margin, towards the bottom there, rose from 42 basis points to 43 basis points of assets under management during the period.

Transaction fee income was GBP8.7m in the first half of this year. That's GBP1.3m lower than in the first half of last year, principally due to a slower pace of investment in property.

Net performance fee income was GBP15.5m. That's less than half of what we earned in the same period last year, but remember last year was an exceptional result. And the GBP15.5m for the first half of this year is in line with the guidance that we gave earlier this year for transaction and net performance fees combined. We expect to continue to generate transaction and performance fees this year and remain comfortable with our guidance of GBP30m for 2008 as a whole.

That takes total fee income in the first half of 2008 to just over GBP143m, 18% lower than in the same period last year, whereas investment income in Henderson increased to GBP7.3m from GBP4.3m in the first half of 2007. And the increase was mostly due to an ordinary dividend received from Banca Popolare, there was none in 2007, and also interest earned on higher average cash balances in Henderson.

So, our total fee margin on average assets under management was lower in the first half of 2008 due to the lower net performance fee income, whereas the net margin on average assets under management increased due to higher investment income and also lower costs.

Now, looking at costs in a bit more detail. Henderson's operating expenses decreased by 23% to GBP89m in the first half of this year. Cost savings, as you can see, were achieved in all categories, but predominantly in variable staff costs. Management took prompt action on costs in early 2008 and has already achieved savings of some GBP20m in the first half of this year compared to the second half of last year and the guidance of GBP30m that we gave previously for the whole of 2008.

And due to this strong cost management, Henderson's expense ratio improved from 65.6% in the first half of last year to just under 60% in the first half of this year, as Roger mentioned earlier. And we now expect to achieve a cost to income ratio of below 65% for the whole of 2008.

Further to my comments a moment ago on costs, here we show the movement in operating expenses in recent periods. Now, variable staff costs, which include bonuses and share plans, move in line with total income and in the first half of this year they do reflect the weaker revenue environment. Fixed costs have also trended down in recent times.

The non-recurring items in the first half of 2008 comprise three in particular. Firstly, a GBP2.5m pre-tax charge for the headcount and related restructuring which we undertook at the start of this year. And as I mentioned earlier, we guided GBP30m of cost savings from this in 2008 and we are tracking ahead of that.

The second element relates to our third party administration review, where we've incurred GBP0.6m pre-tax charge in the first half of this year, and we expect another approximately GBP2m of costs to arise in the second half of 2008. Some of that should be recovered from clients and the balance may be amortized over the life of the new administration contracts.

And the third element relates to our proposed Scheme of Arrangement, where we've incurred costs of GBP0.7m to date. The total cost of implementing the scheme will amount to approximately GBP4.5m. However, as I indicated earlier, we expect the scheme will facilitate an effective tax rate for the Group of approximately 20% per annum and deliver substantial tax savings over the long term.

Now, on the scheme, the proposal involves a change in the corporate structure and organization of the Group, including the creation of a new holding company which will be incorporated in Jersey. As our business becomes more global, the Board has concluded that it would be beneficial to have an international holding company and a Group structure that is more commercially and fiscally efficient. We believe that the most appropriate structure is for the new parent company of Henderson Group to be tax-resident in the Republic of Ireland. The new company will, however, have listing arrangements which are substantially the same as now, that is, dual listing on the London and Sydney Exchanges.

The implementation of these proposals will not result in any changes in the day-to-day conduct of our business or its strategy or its dividend policy. The scheme will require the approval of the Group shareholders and meetings have been scheduled for September 30 for this purpose. It is also subject to Court and regulatory approvals. But we anticipate that the scheme will become effective on October 31 of this year and more information on the scheme will be available on our Company website on September 5.

Moving to the balance sheet, this remains sound with good liquidity, conservative provisioning, prudent gearing ratios, including healthy interest cover. Net assets were marginally lower at the end of June 2008 compared to last year-end. The current level of capital required by the Group to satisfy its Prudential Regulations under the European Capital Requirements Directive is approximately GBP80m, so no change there to recent times, and this results in a regulatory capital surplus of GBP265m at the end of June 2008.

Within the balance sheet, you've got cash and cash equivalents. These amounted to GBP157m at the end of June 2008, allocated as follows. Some GBP50m to regulatory and working capital, as in previous periods. GBP27m to accounting provisions on the balance sheet. GBP24m to Group pension commitments, the lion's share of which, GBP20m of that GBP24m, represents the final special contribution to our staff scheme which is due in October this year. That leaves some GBP56m available for investment in the business.

And our investment objectives haven't changed. The surplus of GBP56m will be used in a number of ways, including additional seed capital for Henderson products, upgrading the infrastructure of the business and also other opportunities that meet our criteria, such as acquiring new investment talent and attractive books of business.

I'll now hand back to Roger.

Thanks, Toby. The next section of this presentation is really about investment performance and fund flows, and I'll also say something about how we see the future.

So, starting with investment performance, the slide here shows the percentage of funds meeting or beating their benchmarks in various areas over one and three years, which we've shown before. No doubt the environment for generating investment returns to clients has got harder in the last 12 months, not just because of weaker markets themselves but also because of the volatility within markets.

And as a consequence, the one year numbers are, to a degree, a little bit weaker than we would like, especially in one or two areas. In particular, investment trusts at 36% and UK Wholesale at 31% have been hurt by weak UK equity results. In turn, that results from a value bias in many of our UK funds, not just an issue for Henderson, which has obviously been a very difficult place to be in the last few months.

The three year numbers, by contrast, especially in these high margin areas which obviously are the key drivers for our business these days, are pretty good across the board. Those are very high percentages by anybody's standards. And the fact is it's the three year numbers that drive investment flows in this industry, so very pleased, obviously, that that's still the case.

Another way, obviously, of looking at investment performance outcomes is the result on performance fees. And obviously last year was something of a stand-out year, but we've forecast performance and transaction fees for 2008 of about GBP30m and in the first half we achieved GBP15.5m just on performance fees. If you add transaction fees to that as well, we're at just over GBP24m, so well on track to meet the guidance that we gave.

And again, it's really good to see us being able to generate performance fees, firstly in a tough environment. It doesn't get any harder than we've had for the last few months. And secondly, again, right across the business and still 39 different clients, obviously a smaller number than last year but still very good diversity. And I think we've always argued there's more resilience in our performance fees than was commonly appreciated and I think there's no clearer sign of that than being able to do that sort of outcome in this sort of environment.

In terms of fund flows, we've already shown that total AUM declined from GBP59b to just over GBP52b over the six months and we've shown here a waterfall slide to demonstrate that. You can see that the market reduced AUM by just over GBP3b. We enjoyed GBP1b of inflows into our Institutional business. Our high margin products, GBP300m in, so GBP0.3b, and I'll show you more detail on that in a moment.

Pearl continues to -- the assets continue to flow out, but as you know we have a guaranteed revenue stream agreement with Pearl. So really the total AUM number with Pearl doesn't affect our revenues particularly one way or the other, so not particularly significant. And the end number there for -- GBP52.6b for the Group.

Just a bit more detail on those fund flows. So, starting with the high margin flows, GBP0.3b into high margin products and really two things going on here. Firstly, in Property and US Mutual Funds we enjoyed steady net inflows during the first half, offset by weaker numbers and outflows in our Horizon range of funds, so those are funds we sell to Europe principally, and our UK Wholesale range plus Investment Trusts.

If you look at the environment, for example, for European Mutual Funds for the industry in the first half of the year, the outflows for the industry were something like $20b. So, the backdrop for us raising assets has obviously been very difficult. But to have a GBP0.3b inflow for high margin products in the first half against that background we think is a creditable performance.

As regards hedge funds, which is really important business for the future for us, flows in the first half were flat, i.e. neutral. But we've expanded capacity in some of our more successful hedge funds within the range, so we're hopeful we'll be able to add assets in that area in the second half of '08 and into 2009. Two or three funds in particular we've got high hopes for.

And finally on fund flows, Property, you can see we had inflows of GBP0.6b in the first half but we've still got a pipeline of GBP2b to invest. That's money that clients have already given to us that we've not yet invested and therefore it's not included in the AUM number and it's not contributing to revenue yet. And on top of the GBP0.2b, we did what will probably turn out to be one of the largest property deals in the UK this year, buying three Outlet Malls packaged into a single fund to the tune of GBP365m, so obviously that helps to drive revenues in the future as well.

And finally, and it's the biggest number on the slide so in a way I'm not sure why we've put it last, but we enjoyed a GBP1b inflow into Institutional. And that's a real turnaround in that business from previous years. In the last couple of years, we've suffered outflows in Institutional because of the erosion of the old fashioned balance book. This business is very much focused on fixed income and David Jacob's area. It's not fantastic margin, but again it's business we'd rather have than not. And we have possibilities in that fixed income franchise, including high margin business to develop that further.

Just one more thing to say on our Property business. We still get a lot of questions on our property sector because of the turmoil that's going on in that particular industry and I just wanted to show you the position at the end of June 2008 compared to December 2007. You can see our total assets under management in property at the end of June were GBP9.9b, which is actually slightly higher than the position, GBP9.8b, at the end of December 2007.

And the main driver of that, if you look at this slide, has been within Europe, where our AUM in closed-ended funds has gone from GBP2.5b to GBP3.4b. Part of that is currency but we've also had inflows into that part of our business. And again, you can see that the open-ended funds, which is where the redemption risk, if you like, lies in the Property business, really, GBP0.9b in total and the number of redemption notices we've had from clients remains negligible.

So, that Property business, notwithstanding what you read in the newspaper, is proving to be very resilient for us. And as I just showed you a moment ago, there's still a GBP2b pipeline to invest which we've not included in those numbers.

Just reverting back to trends in the whole business, we've used these triangles before to show the proportion of assets under management and revenues accounted for by our high margin business lines, so 50% of our AUM but now 81% of our revenues. And it reinforces the theme in this and earlier presentations that it's the improving mix of business that has helped to drive our revenues and profits higher in the last few years.

In terms of the outlook for the rest of this year and moving into '09, I have to say we're not particularly optimistic about markets. In fact, we're probably a little bit on the cautious side still. We don't see why indices should make any particular progress and, as a consequence, we would expect investor confidence, the client confidence, to remain relatively fragile. So, although there are opportunities for us in building AUM, in hedge funds, in Institutional, in Property, we would think the growing of mutual funds would remain pretty tough, so something of a mixed picture on fund flows.

On profits, it remains our goal, as we've said earlier this year, in 2008 to meet or beat Henderson Global Investors' 2007 result, which was GBP109.6m. And definitely the resilience of our business, combined with the prompt action we took on costs earlier in the year, should enable us to deliver on that forecast.

If we do that, that will imply a cost/income ratio below 65%, so further improvement in profitability, which is good. And importantly, that sort of cost/income ratio gives us a really high degree of operating and financial leverage for the future, so that if there is an upturn in markets you will see profits flow through to the bottom line quickly.

If you take that objective of GBP109.6m for Henderson, you knock off what Toby has said on corporate costs of GBP8m, you knock off his forecast on interest payable of about GBP11.5m, it translates through to a Group forecast of us meeting or beating a Group pre-tax profit number of about GBP90m. So, this takes you through from the Henderson Group level down to the -- the Henderson Global Investors level down to the Group pre-tax profit of GBP90m.

On acquisitions and lift outs, you heard Toby's comment. We're continuously looking for -- to look for opportunities that meet our criteria, but our focus obviously is mostly on profitable organic growth. It's fair to say, I think, that the bid/offer spread in acquisitions remains pretty wide, so I don't think there's any massive hurry, but we'll continue to look at lots of different things.

I think the summary of all that is overall our business remains in good shape. Despite the environment we're experiencing net inflows, which is a testament to our diversity in the business. We've found ways to improve costs, to reduce costs, to drive margins higher, but obviously without doing any damage to the fabric of the business.

In any upturn in markets, we've got a broad range of products, we've got good long-term performance and obviously, from a financial point of view, there's a lot of financial leverage on the upside in the business. So, I think we're in -- overall, we're in pretty good shape considering the market background.

The final part of this presentation, just briefly. Obviously, we've announced also that I'm stepping down as Chief Executive of Henderson, which will be effective in November of this year. It's been a very busy few years, one way or the other, and for me it's the right time to take a career break. We've got a strong and successful business. It's been a real privilege to lead it in the last few years. And we've had fantastic support from our shareholders, so a massive thank you to them.

I'm delighted the Board has chosen Andrew Formica as my successor. Those of you who are not physically here, he's actually in the room with us. Having worked with him very closely over the last few years, I absolutely know he's the right person to take Henderson forward. He's a very talented fellow, sparing his blushes, and he's obviously got the full support of the Board and the entire management team. And obviously, Andrew will talk to shareholders and analysts about his plans for the business in the next few months.

Once Andrew becomes CEO, David Jacob, who is next to him, will become Chief Investment Officer and will be Managing Director of our Listed Assets business, so one more change there.

That concludes the formal part of the presentation. We'll now take questions. And on the phones, if the operator could provide instructions, that would be terrific. But we'll start in the room with questions here.

Hi. It's Michael Long from KBW. I had a quick question about the Institutional inflow of GBP1b. You mentioned that was mostly focused on the fixed income business but I also noticed on the performance table the fixed income business was one of the areas where three year performance numbers were a little bit weaker. About 36% was the benchmark. Could you just explain why you were able to generate such good inflows in a very tough environment?

Yes. Fixed income is a very diverse area, so it includes everything from index-linked gilts to government bonds, to investment grade credit, to high yield, to secured loans and so on, and David could probably answer this question better than me, which I might get you to. If you've got anything to add in a minute, you might say so. But the wins we've had have been very much focused in the credit area and that's an area where performance, David, I know has been pretty strong, but you might want to just add to that.

The business mix has also changed significantly in the last three years in Fixed Income. The demand is much more in the high alpha space. We have a different range of products. We have absolute return fixed income products. We have a high alpha suite of funds that we've recently launched, allowing investors to take advantage of more derivative exposure and the like. So, if you saw, the one year numbers were 67%. The momentum is in the positive direction, but they do -- the one and three year numbers do hide a quite different mix of business.

This is Andrew Mitchell from Fox-Pitt Kelton. Three questions. First, I was wondering if you could help us thinking about the performance fees. I don't know quite how it works out overall, whether the difficult markets impact you in any sense because of high water marks. I don't know if you've got any significant quantity of high water marks that might affect '09.

And secondly, you mentioned that property had been pretty resilient in terms of not having redemptions, and yet I think the statement talks about a more difficult performance. So, will there be a lagged effect there?

And thirdly, on the -- you mentioned the hedge fund potential. Can you give any broad indication of what the capacity might be and which hedge funds it is that show the promise?

On performance fees, absolutely not going to forecast 2009 performance fees at this stage. Andrew can deal with that later in the year or into 2009.

There are high water marks on our hedge funds principally, but we have probably over 100 different funds that have performance fee opportunities on them, so it's hugely diverse. And as I said in the presentation, I would expect our performance fee outcomes to continue to show a lot of resilience because of that diversity.

Property, it's a fair question as to whether there is any lagged effect. The important point is to remember what proportion of our total AUM is constituted by closed-ended funds, where the only way out of the fund is to find a matched buyer, so -- but that doesn't affect our AUM. The redemption risk relies in those GBP1b of open-ended funds. And all I can tell you is that the redemption notice we've had is low millions of pounds, just negligible, because these are long-term institutional investors that have made a strategic allocation to property. So, we do think it's a resilient business.

And finally, on hedge we've got -- when we're talking about reopening capacity, we've got two or three funds in mind particularly, for example the Asia Absolute Return Fund where we've added another GBP400m of capacity. We've got additional capacity in something called the Star Rotational Fund. Actually, we've added a little bit of assets there and potentially more. We've got [Pacean], our UK longshore fund, which so far this year is up about 15% or something like that, so great numbers, and so on and so forth. So, lots of opportunities there ahead.

Yes. Chris Smith, Jefferies. Sorry. A question about the tax scheme arrangement. And I say this as a novice in this area, but it's quite a high profile move, so I just wondered whether you'd -- I'm sure you have, but is there any political risk, number one?

Secondly, obviously you're aware, I'm sure, that companies do adjust their value in the stock market for low tax charges, so I just wonder whether, looking at the fact that -- looking at the slide here, it's 70% of your assets are geographically based in the UK. Can you just run through a little bit your thoughts about the risk of this and whether there were any other options, such as through the funds maybe you could reduce tax through domicile changes there? Thanks.

No. Had we done nothing, we faced -- as we've said before, we faced the prospect of the tax rate moving to the statutory rate, 28%, over the next couple of years. So, if you think about what that would've done, any progress we'd made in the P&L account would've been really nullified by the tax rate going from 13% to 28%. It would have been really hard to drive earnings per share against that background.

So, we looked at a range of options, from minor tax strategies to a more radical thing such as we've announced today. The political -- it's done really because of our fiduciary duty to our shareholders. I don't think myself there's a particular political dimension to it. Obviously there's a lot of media interest, but I don't think there's a political dimension to it. It's a straightforward move on our part to help to drive shareholder value. And clearly, we're not the only company that's announced that. Brit you saw yesterday, Charter again this morning, so there are others pursuing the same course.

Are there any other risks associated with it? Clearly, all tax issues, there's an uncertainty about them. But we've looked thoroughly into this and we are -- we believe strongly that we can do what we've said we'd do, which is to generate a tax rate of about 20% for the future, which will help to protect our earnings per share against where we would otherwise be.

Thanks. Just a supplementary on that. I completely understand where you're coming from, but where you are coming from obviously is a very low tax rate, which the others aren't. Were this to open the flood gates to masses of companies doing this, there's obviously a risk there that there would be some potential changes in legislative terms.

It's possible. We've just got to deal with the world as it is. And my own view is that any action by the authorities tends not to be retrospective, so from that point of view it's probably important to move quickly.

Roger, it's also worth just adding that you're right that we remain a substantial UK business and we will continue to pay substantial UK taxes notwithstanding this Scheme of Arrangement. That's why we've guided an ETR target of 20% relative to the statutory rate in the Republic of Ireland of 12.5%.

Hi. Carolyn Dorrett from UBS. Two quick questions, if that's all right. First of all, in terms of meeting your full year '08 operating profit targets, obviously there are cost reductions within that, so as I understand it GBP20m cost reductions came out in the first half. Can you give an outline for what cost savings you are expecting for the second half and where they arise from?

Yes. I think I said that in the first half we achieved savings of GBP20m relative to the second half of last year. Relative to the first half of last year, it was over GBP25m. And therefore we are tracking somewhat ahead of the guidance we gave earlier in the year, of GBP30m for the whole year.

So I think the right way of thinking about the second half of this year is probably more of the same. If there is no material pick up in markets, probably another GBP25m, GBP20m to GBP25m, of savings relative to last year in the second half of the year, meaning GBP45m, GBP50m for the year as a whole, relative to the whole of 2007.

The really -- the biggest contributor to that, if you look within it, we won't break it down in absolute detail for you because we wouldn't want to make your job too easy, but the biggest individual contributor is a decline in variable compensation.

And the beauty of Henderson's P&L account and the model we've set up is that variable compensation flexes downwards when we don't meet our objectives or fund flows are not as big as we would like or performance fees are not as big as we like. There's a natural flex in our numbers, as we've tried to show on one of the slides, the one that showed fixed costs and variable costs, which is really helping to protect the P&L account.

So, in the variable compensation, the discretionary bonus will be lower this year, quite a lot lower this year than it was last year, the cost of share plans will be less than it was last year, the cost of sales incentive schemes will be less than it was last year, and the cost of what we call growth equity bonus scheme, which is a revenue-sharing deal with the fund managers, will also be lower than last year. Obviously, if markets in our business picks up in the future, you would expect variable compensation to increase again. But it's a great protector of the P&L account in this sort of downturn.

And the second question, just in terms of strategy, you were talking about potentially acquiring teams of people, books of business. You've obviously mentioned hedge funds in terms of where you've increased capacity. Can you just talk a little bit more about where those teams or people might fit in?

Well, we are looking quite widely, both geographically and by type of team and business but I think it's fair to say that hedge is a principal area of interest. And we've got a couple of things that are of interest right now and maybe will come to fruition, maybe they won't, depending on that bid/offer spread I talked about during the presentation, but I think it's fair to say hedge is a primary area of interest for us.

Okay. That's -- we're going to try to take a call from the phones.

Our first question comes from the line of Nigel Pittaway. Please state your company name and go ahead with your question.

Morning, Roger and Toby. It's Nigel Pittaway here from Citi. I just wondered if you could make a comment on management fee margins. Obviously, if you do the management fee to average fund calculation that you now enable us to do, you do get quite a lot of decline in areas such as Horizon, UK Wholesale, UK Property and one or two others. Now, I appreciate there's probably a little bit of average sum impact there, because obviously what happened to markets early on in the period, but I was just wondering if you can just give us a little bit more color as to how you are seeing your management fee margins so we can interpret that apparent decline.

There's obviously -- I don't think this is your question. There's obviously a decline because -- in the total numbers because of the lower performance fees, so total fee margins go down from 56% to 53% or something like that. I can't quite remember the exact numbers. Management fee margins in total went up by, I think, 1 basis point, from 42% to 43%. Within each individual category, I haven't got the numbers in my head, Nigel, to be perfectly honest with you, but now you've asked the question we'll think about it and if we may we will get back to you.

I can't think of anything in particular that would be a big driver of lower margins on average funds under management. Horizon selling the fixed income absolute return fund might have a marginal impact, but not much.

Nigel, it's Toby. You know the underlying rates, so the margins that we agree with the client, are all pretty resilient. You are getting the market effect. If you are looking at the table, for example, in our preliminary announcement, for example by line of business, obviously those management fee numbers include market effect as well, which is kind of a drag. But the headline rates that we agree with the clients are proving resilient across all our higher margin lines of business.

Yes, there's certainly been no discounting going on or anything like that, Nigel.

Right. Okay, fair enough. And then maybe could I just follow up on -- just on the comment you've made on the pension scheme in the accounts? Just I think you've referred to the fact that there is going to be a strengthening of longevity assumptions, which may impact '09 earnings. Just wondering whether or not that impact is likely to be at all material.

Well, I'm not sure if it's a good or a bad thing. As Finance Director, it's probably a bad thing pension scheme members are living longer than ever before.

That's a good thing.

Especially well paid fund managers. But yes, mortality risk is something that the whole industry is trying to grapple with. So many of these final salary schemes are now closed, including our own some six or seven years ago, but for the actives and other members that remain in the scheme you have to look at improving longevity trends across the industry. The next triennial valuation of our scheme is due as at the end of this year. We get the results some time during the first half of next year and we are quite prepared for discussions with our scheme trustees on this issue.

As a rough rule of thumb, our current mortality reserving is certainly well within the UK occupational scheme pack, at something called medium cohort. Some schemes are taking a more conservative view now and moving to something called long cohort, which assumes a longer period of improvement in longevity rates. And that might add somewhere between 5% and 8% to our pension scheme liabilities.

So, that gives you a rough order of magnitude. The current scheme has liabilities of around about GBP300m, so those are the sorts of numbers that we will be discussing during the course of the next valuation period.

Okay. Thank you.

Thanks, Nigel.

Our next question comes from the line of Arjan van Veen. Please state your company name and go ahead with your question.

Yes, hi. It's Arjan van Veen, Credit Suisse. Hi, Toby. Hi, Roger. Firstly, Roger, the business is almost unrecognizable from December '03, so congratulations in terms of where you've taken the Company. Two questions, if I may. Firstly, on the property pipeline, the -- given we are a bit far away from that market, can you give a bit more color as to whether you are starting to see some value, i.e. some potential for investment of that GBP2b pipeline?

And the second one is technical, so I will hold off on that one.

Okay. Thanks, Arjan. The pipeline, I would say six months ago, if you'd have told me what property markets were going to do, I would have said that that would be a great background for us to get more of that pipeline invested. As it's played out, our fund managers within Property are probably amongst the more cautious of participants in that market, so they are, rather to my frustration, slightly sitting on their hands with that pipeline thinking there's a better deal around the corner. And in our own forecasts, we're not forecasting the bottom of the property market until the end of Q2, early Q3 in 2009.

So, it may be that we don't invest the bulk of that pipeline until Q1, Q2 of next year. Certainly, the -- I get the sense that our fund managers feel quite strongly that to generate good performance in the future there will be better prices available through some distressed sellers in a few months' time. And obviously, our primary job is investment performance, so we have to back their views. So I think it will be perhaps a bit longer than we would otherwise have expected to get that pipeline invested.

Thanks. The second question is probably for you, Toby. The own shares, the GBP52.4m which is deducting and adding back, I might have misread it in your previous account, I'm diluting for that, can you just explain are those treasury -- I'm sorry, held in trust or something along those lines?

Yes, that's -- we've got treasury shares and own shares, so in the basic calculation you take out both, Arjan, in the fully diluted calculation. You add back the unconditional awards in the own share category, so these are all the share plans without performance hurdles attached to them. That's the GBP52m that you refer to.

And can you buy them on market yourself, is that the process?

There's a small element of share issuance for the more immaterial schemes, but the lion's share is bought on market, yes.

All right. Thanks very much.

Our next question comes from the line of Bruce Hamilton. Please state your company name and go ahead.

Morning. Hi, yes. Bruce Hamilton, Morgan Stanley. Most of my questions have been asked but I just, I guess, had a couple on the performance stats, which have been very transparent in some of the modest decline in performance. Given that retail typically tends to sell off one year performance, I just wondered whether you felt that the trends in terms of flows, particularly investment trusts in the UK, were actually deteriorating or whether they were quite stable versus the first half.

And then, within the Institutional business, I think like BGI enhanced index has been quite a tough space because the screens haven't necessarily worked as well. What's the -- what proportion of your asset base is in enhanced index? And can you just remind us also what the proportion of the assets in balanced institutional are as well? Thank you.

Toby, while I'm answering the first part of that, you might just get the enhanced index AUM number. Even though it's a low revenue number, you might just see if you can find it in there and the balance number.

But on performance, Bruce, I think I'd disagree with your premise about one year numbers driving flows. The market, both if you look at the US mutual fund industry, for example, it is absolutely driven off Morningstar ratings which require a five year track record. And the UK market is not much different to that. If you look at the big fund supermarkets, the Skandias of this world, they're absolutely only interested in three to five year track records, so that's what we -- that's absolutely what we focus on.

The investment trust obviously is a closed-ended business, so there isn't really a risk to flows there. And in fact the outflows we had were in enhanced -- was an enhanced index mandate which is fundamentally lower margin. In fact, within our -- within the UK retail business we had outflows, as you saw -- as you've seen but, again, the business to a degree was protected by the product breadth we have there.

For example, we have two of the best selling fixed income funds in the industry, in the Preference and Bond Fund and Strategic Bond Fund run by a guy called John Pattullo. So, if we are in for continued tougher times, we think we're as well placed as anyone to get our share of flows in those areas. But as I've said, the overall background to mutual fund investing I think is going to remain a tough one.

On the AUM and enhanced index, I'm just going to look at Toby.

Yes, yes. I'll do my best because we haven't actually quite -- I'll do my best, Bruce. We haven't quite cut the numbers in this way but excluding Pearl, enhanced index is going to be a few billion pounds.

A few billion pounds?

Yes, across a range of different fund wrappers, investment trusts as well as (multiple speakers).

But it's a fundamentally low margin business. We wouldn't make much more than 10 basis points on our total enhanced index book.

And on balanced, we are down to our last billion or so of balanced money.

About a billion, Bruce, in balanced.

(Multiple speakers) quite irrelevant now.

Great. That's very helpful. Thank you.

Our next question comes from the line of Kieren Chidgey. Please state your company name and go ahead.

Hi. Kieren Chidgey from Merrill Lynch. I was just wondering on the variable staff costs, which is obviously been the key area which has absorbed a lot of the impact this period. Do you think about that as a proportion of the revenue within Henderson Global Investors? And if you do, I think it was about 16% in the half. How can we expect that to trend back, as markets normalize? Should we be thinking about an '07 ratio as an ongoing level?

No, I wouldn't take '07 as a guide. '07 was a good year in lots of ways and bonuses were what I would regard as full, both on discretionary bonus and share plan costs and so on. So I don't think I would -- I think I'd prefer not to give you a percentage. Perhaps a better way of thinking about it is to say that in 2008, if we meet our objectives, the discretionary bonus element of the variable compensation would be just below the target expectations for each individual in the firm, whereas in 2007 they were obviously significantly in excess of people's target expectations.

Okay. Thank you.

Next we have a question from the line of Mark Hancock. Please state your company name and go ahead.

Good morning, Roger. Mark Hancock from Precept.

Morning, Mark.

I can only echo Arjan's comments earlier. Can you hear me?

Yes, I can.

Yes, I can only echo Arjan's comments earlier. Sad to see you are going, Roger. You've done a fantastic job. Certainly, on behalf of my clients, they certainly appreciate your work. It's ironic to see an Australian at the helm. I understand he is Australian, from (inaudible) and actually from the A&P originally.

Yes, we appointed him despite that.

Three questions - one about currency, one about revenue and one about costs. Just on the currency, obviously the US dollar has been weak during the period and currency has been moving around quite a bit. I wondered if I could -- could one assume there was an overall adverse impact from currencies and would you be able to quantify what the constant currency profit might have been?

Hello, Mark. It's Toby. I think the euro has been strong for a while and the dollar seems to be coming back a bit. Given our businesses are profit making in those two areas, it has a slightly beneficial impact on the P&L.

Sorry. During the half, it was beneficial?

It has a slightly beneficial impact, yes.

So euro was stronger on average against sterling?

Yes, has been for some while.

Okay.

It wouldn't be a big number.

It wouldn't be material, not more than GBP1m?

Well, we won't put a number on it, Mark, but it's not millions of pounds in profit terms.

Secondly, on the revenue, obviously markets have been trending lower during the year and they must be lower now than on average during the period that we are discussing.

Yes.

Could we therefore assume that if markets don't recover we're looking at lower revenue lines in the second half versus what you have just reported?

Well, you've got to -- you've definitely got to take the average index levels and assume there is an impact on the revenue line. So, if markets are, on average, lower in the second half than the first half, which if they stay unchanged they will be, then the management fee line logically would be lower again. But as I said, we've taken all that into account in our forecast about profitability and so, as long as there is no significant downside in markets, then we stand by our forecast.

Thank you. Thirdly, on costs, have we seen a full period impact in that first half of the initiatives that you have made in terms of cost reduction?

Me again, Mark. No.

(Multiple speakers) the second half cost base other things being equal would be less?

No. In short, we haven't seen the full year impact yet. We took action on the staff costs in February of this year and the non-staff costs in April. Notwithstanding that, we still achieved GBP20m of our GBP30m original target in the first half, with another GBP20m to GBP25m to follow in the second half.

And I know you are all pretty fast on the ball, you lot, so as I said to somebody yesterday, we've given you the profit number, we've given you the cost to income ratio number, so you can back [source] to the cost base if you really want to.

Thanks, Roger.

Thank you.

Our next question comes from the line of Andrew Hills. Please go ahead, announcing your company name.

Yes. Good morning, Roger. It's Andrew Hills from Wilson HTM here.

Hi, Andrew.

Is the -- hi. Is the big reduction in bonuses having an impact on morale of the PMs and other staff for that matter? Has there been any backlash?

They haven't got their bonuses yet. They don't get their bonuses till March, February/March 2009, so I guess we will really find out then. But bear in mind that 2007 was a very strong year for bonuses, so we are not talking about taking bonuses to zero or anything like that. It's still a substantial amount of money we will pay out in bonuses. It's just significantly less than last year. And that's why I think we've got the modeling for this business right, because you do want variable comp to flex down when times are tougher and that's exactly what's happening.

But do we think it will be a position where because of what we're doing we'll lose people? Absolutely not. We wouldn't take any risks with the infrastructure of the business.

Okay. Thank you.

(OPERATOR INSTRUCTIONS).

[Can we ask] if there are any more questions in the room?

Catherine Heath, Altium. I'm just wondering, you've talked about the lean cost base you may have going into a new rising market, let's say. What are your thoughts in the event that the market takes a further downward move going into 2009 in terms of costs, please?

Well, look, there comes a point when the staff having taken some of the strain, the shareholders would have to take some of the strain. If you predicate a market at 3,000 or 3,500, there will come a point when you just have to say enough is enough and we'll ride it out. But I take the view that you never say you can't do any more on the cost front. I think, having done what we've done, it will be more marginal, anything else we find, if it's necessary but I would never say never.

Thank you.

We've got one more on the telephones.

We have a question from the line of [Diana Mitchell]. Please go ahead.

Hi. I've just got a couple of questions. Firstly, if you could just give us an update in terms of the sensitivity of revenues to movements in the FTSE.

Secondly, just in terms of flow since balance date.

And thirdly, in terms of previous guidance you've given on performance and transaction fees, bar this year of course, has been around GBP50m. Could you give us an idea in terms of your assumptions or some background in terms of how you come up with that and what kind of market conditions would make that achievable?

Yes. I'll get Toby to answer the sensitivity of revenues based on the FTSE in a moment, although he's not looking too enthusiastic about the prospect. We'll see what he comes up with.

On flows since the balance sheet date, it depends where you look. I would say that the mutual funds in aggregate have remained a tough area. Horizon was negative in July but positive in August. Retail small flat in both months. US mutual funds negative in July. I haven't seen the August numbers yet, to tell you the truth. So, that's consistent with really what I've said about mutual funds. Property is lumpy. You saw the GBP365m, that deal which is now in our AUM at the end of August, whereas it wasn't at the end of June. Hedge, we've opened this capacity and we are out marketing right now, so we will see as the next few months go by. So those are the principal trends.

On performance fees, we actually forecast GBP30m on performance and transaction fees for 2008. And obviously we did GBP24.2m, I think it was, for the first half performance and transaction fees together, so GBP15.5m performance fees and then 8-point-something on transaction fees. So, we are well on track to deliver to our forecast, maybe a couple of million better than that.

How do we do that? Well, obviously, on performance fees there's a huge range of different funds which have different benchmarks, different time periods over which they are measured. Obviously we look month by month, sometimes even week by week at the trends we've got and it's not as hard as you would think to give a sensible estimate as to where the outcome may be. It's more art than science but we've been able to do it fairly consistently in the last couple of years.

On that market sensitivity point, another one of my rules of thumb. Broadly speaking, a 1% per annum move either way in average market levels is about GBP1.8m off our top line, so that's the top line before any management action to mitigate the effect of that.

Does that answer your question?

Yes, it does. But just with the performance and transaction fees, I realize that was for FY08 but I think prior to that there had been guidance of about GBP50m, obviously not before this (multiple speakers).

Yes, you are quite right. And no, you are quite right. And in 2007 obviously a bit better than that, 67-and-a-bit million in performance and transaction fees together. I think it assumes -- to make a GBP50m number assumes steady state markets. I think most people, and hopefully you included, would forgive us for only doing GBP30m plus a bit in an environment where the market is down anywhere between 10% and 20%.

Okay. Thank you.

We have no further questions from your telephone participants.

Okay. Let's check there are no more here in the room. Okay. Thanks for listening in and thanks to everyone in Australia who -- I know it's early evening there, so I really appreciate you taking the time. Obviously, I will see some of you next week. Thanks very much. Bye.