Janus Henderson Group PLC (JHG) 2009 Q2 法說會逐字稿

Good morning and good evening for those of you who are listening in in Australia. Thank you for joining us today as we present the Henderson Group 2009 interim results.

In addition to the information in the presentation, there's also more detail in the interim reports and accounts, which we launched earlier today and both documents are available on our group website.

Let me make first a few initial comments and then Toby, our CFO, will cover the financial details -- the financial results in more detail and thereafter, I will pick up more about the performance of our business and our priorities and outlook in the short to medium term. I will be happy to take questions at the end of the briefing.

If we turn to the overview, it is now well-documented that markets were particularly challenging in the first half of this year. The average equity market levels were around 30% lower compared to the first half of 2008 and combined with subdued investor demand, this has resulted in our revenues declining by 23%.

Lower costs in the business in the first half and the benefits of New Star for nearly three months have helped offset some of this impact; however, profits are still almost 50% lower at GBP27.1 million. As a result, Henderson's cost income ratio increased to 70% from 59.8% in the first half of 2008.

Assets under management increased by 7% from GBP49.5 billion at January 1 to GBP53 billion at June 30, 2009. This includes the GBP8.1 billion of New Star assets we took on on April 9. Our investment performance remains competitive with good performance in most of our key funds in the equity and fixed income ranges. Investment performance of the New Star funds we acquired has also started improving.

The acquisition of New Star has been a success and has significantly strengthened our position in the UK retail market. The integration of this business is going very well and is ahead of target. The deal metrics continue to meet or exceed the assumptions we made when we announced the deal at the start of the year.

Today, the Board has also declared an interim dividend of 1.85p per share, the same as the interim dividend paid in 2008. It has made the decision in light of the improving outlook of the markets, the continued underlying strength of the business and progress in generating new assets from clients. The Board will take a final decision on the final dividend for 2009 in February of next year.

Although markets have recently improved, they are still well below the levels of 2007 and 2008 and therefore, 2009 will be more challenging for earnings. However, we should also benefit from a full period of ownership of New Star in the second half of 2009 and the growing interest of clients and our products that we have seen of late. In addition, our competitive long-term investment performance, diversity of revenue and active cost management should provide some support.

We remain committed to providing clients with higher value-added investment products in all market conditions. Our future focus continues to be on generating profitable organic growth, but where we see opportunities at attractive prices to expand our product offering and build marketshare we will seek to take advantage of them. I will now hand over to Toby to take you through the financials in more detail.

Thanks, Andrew. Good morning and good evening, everyone. So group recurring profit before intangible amortization, void property finance charge, nonrecurring items before tax was GBP27.1 million in the first half of this year. That is within the profit range that we guided on July 16, which was GBP25 million to GBP28 million. This profit was 47% lower than the comparative period last year as a result of sharply lower markets and investor confidence.

Within the group profit figure, Henderson delivered a profit before tax of GBP34.7 million. That's 43% below the result in the first half of last year, whereas corporates made a loss of GBP7.6 million compared to a loss of GBP9.8 billion in the first half of 2008. A 10% reduction in corporate office costs was complemented by a 32% reduction in corporate net interest expense, which includes the amortization of profit arising on the unwind of an interest-rate swap on the corporate debt in December of 2008. We expect corporate costs in the second half of 2009 to remain at a similar level to the first half and corporate net interest expense to be approximately GBP3 million less than in 2008 at around GBP8 million this year.

The GBP3.5 million charge in respect of investment management contracts and void property provisions is a consequence of the New Star acquisition. We gave some detail on these charges in our market update in July and therefore, I won't dwell on them again; although we do reproduce the information in the appendix to this presentation for your convenience.

The group made a recurring profit before tax of GBP23.6 million compared to GBP50.8 million in the first half of last year. After nonrecurring items, namely the New Star integration costs, the group made a loss before tax of GBP2.9 million in the first half of this year and I'll say more about those integration costs in due course.

Turning to tax, in the first half of this year, the effective tax rate for the group on recurring profits was 19.7%. That's in line with our previous guidance. And we expect the group to achieve an effective corporate tax rate on recurring profit of approximately 20% per annum from this year onwards.

Basic earnings per share before intangible amortization, the void property finance charge and nonrecurring items declined by 57% to 2.9p. This was the result of lower earnings and also the impact of the share placing earlier this year to part finance the New Star acquisition. But we remain confident that this acquisition will be significantly earnings-enhancing from 2010 onwards.

Slide 4 shows Henderson's results in more detail. Net management fee income in the first half of 2009 was GBP98.2 million, 18% lower than in the same period last year, mostly due to markets, including equity markets, which were, on average, 30% below the levels of the prior year. The largest contributors to management fees in the period were wholesale, Pan-European property and institutional funds.

Transaction and net performance fees in the first half of this year amounted to GBP15.6 billion in total. Transaction fees were GBP10.4 million, 20% higher than the same period last year, principally due to structured product advisory fees, some additional [sub] and main register fees on (inaudible) following the New Star acquisition, and higher profits from foreign exchange dealing.

Net performance fees were GBP5.2 million, 66% lower than the first half of last year. Opportunities in the first half of 2009 were adversely affected by falling markets, especially in the hedge and Horizon fund ranges where the funds have high watermarks. Andrew will talk more about performance fees later. However, with the market outlook somewhat improving, good investment performance in some of our key funds, and also the benefit of New Star, we now expect transaction and net performance fees combined to amount to at least GBP25 million this year. That's ahead of our previous guidance of GBP20 million. That takes total fee income in the first half of 2009 to GDP113.8 million, 21% lower than in the first half of 2008.

Investment income decreased by 77% to GBP1.7 million in the first half of this year. The decline was due to lower interest rates on lower cash balances due to the New Star acquisition and also lower returns from the group's investment portfolio.

Good net fund inflows into our institutional business, mostly fixed income and cash mandates, modest net fund outflows from our higher margin products, and lower markets meant that lower average management fee margins declined from 43 basis points of assets under management in the first half 2008 to 40 basis points in the first half of this year. However, management fee margins did improve slightly on the second half of last year due to New Star and this trend is expected to continue into the second half of 2009 with a full period of New Star ownership.

Our total fee margin on average assets under management in the first half of this year also fell compared to the first half of last year due to lower net performance fees and investment income, but it too was slightly higher than the second half of last year due to transaction and net performance fees. Finally, the net margin on average assets under management declined by 8 basis points to 14 basis points, mostly due to lower management fee income; although lower costs helped to cushion that fall.

And moving on to Henderson's costs, total operating expenses decreased by 11% to GBP79.2 million in the first half of this year. This was mostly due to a decline in staff costs partially offset by New Star operating expenses. Investment and IT costs increased by 24% and 20% respectively in the first half as a result of New Star.

Office costs were 20% higher compared to the first half of last year due to the loss of sublet income earned on our former London office together with some adverse inflation and currency movements offsetting our otherwise cheaper new London headquarters.

In our first quarter of owning New Star, we reduced its operating expense ratio to approximately 38%, which is ahead of our target of 40% or better from January 1, 2010. And excluding the impact of New Star, old Henderson's operating costs also fell by 17% in the first half of 2008 to the first half of this year, which is also slightly ahead of previous guidance.

But notwithstanding our efforts to control costs, the fall in revenues during the period outweigh the reduction in expenses resulting in an increased cost to income ratio for Henderson of 70% from approximately 60% in the first half of 2008.

Further to my comments on the previous slide, here we show the trend of operating expenses compared to income. Within the expense totals, you can see the mix of fixed and variable staff costs and the compensation ratio as a whole, which remained flat during the first half of this year at circa 40%. If markets continue to improve and revenues increase, we do expect to see an increase in future variable staff costs.

The nonrecurring charge of GBP26.5 million before tax relief in the first half of this year relates to staff restructuring, consolidation of third-party administrators, product rationalization, rebranding of the UK retail business, void property, and certain other one-off items associated with the New Star acquisition. New Star integration costs as a whole are still expected to remain in line with our guidance of around GBP31 million post-tax. That's GBP40 million before tax.

The group's liquidity position remains satisfactory at GBP90 million, notwithstanding the short-term costs of financing the New Star acquisition. The upcoming interim dividend will be funded from these resources plus cash flows generated in the third quarter of this year. The group's gross debt position remains unchanged at a nominal GBP175 million, i.e. it did not increase with the acquisition. Net of cash, it amounted to GBP85 million at the end of June 2009.

Gearing ratios remain comfortable and the business continues to generate good interest cover notwithstanding challenging market conditions. In addition, the business continues to enjoy a strong regulatory capital position, including a regulatory capital surplus of GBP327 million at the end of June 2009. That is after taking into account the waiver from consolidated supervision, which the FSA renewed for five years following the acquisition of New Star. I will now hand you back to Andrew.

Thank you, Toby. I will cover a few points on how the business is performing at the moment and also comment on how I see the future for Henderson. If we just touch base on the New Star acquisition, as we mentioned back in July when we last provided an update, the integration of New Star is going well and is ahead of target. We have retained the key investment management and distribution staff and have stabilized the business quickly.

The current management fee run rate is GBP50 million and asset retention levels are around 79%, better than expected and also slightly higher than mentioned in July and predominantly due to higher markets. In addition, we reduced the expense ratio on the acquired New Star business to approximately 38% and this is applicable from July 1, 2009 rather than January 1, 2010 like we first expected. Positive feedback from independent financial advisers and other distributors has combined with improving investment performance in the (inaudible) New Star UK retail funds has significantly strengthened our position in the UK retail market.

In July, we updated you on our net fund outflows for April, May, and June of GBP0.7 billion for New Star, driven largely by known outflows of a property mandate for terminated accounts in the New Star institutional managers business. In July and so far in August, we are seeing improving trend with outflows of GBP0.2 billion, half of which relates to the notified pipeline we updated you on in July.

As I mentioned earlier, the deal metrics continue to meet or exceed the assumptions we made when we announced the deal at the start of the year. New Star's contribution to group earnings will increase in the second half of 2009 with a full period of ownership and as Toby mentioned already, we expect this acquisition to be significantly earnings-enhancing from 2010.

If we look -- if we turn to Henderson Global Ivestors' investment performance, on this slide, we show you the asset-weighted investment performance of our funds over one and three years. Given the tough environment in which we've had to generate investment returns for our clients, we are encouraged by the investment performance in both equity and fixed income. Of course, within these numbers, some categories were weaker than we would prefer. However, more recent statistics show an improvement in these areas and specifically a significant improvement in our hedge fund performance where, year to June, the figure would be 100%.

The US wholesale fund range has maintained its excellent track record with 98% of assets outperforming over one and three years. The Horizon [sea calves] have also delivered strong performance with 75% of assets beating target over one year and 85% over three years.

In the institutional business, 65% of assets have beaten their benchmarks over three years and excluding the impact of the New Star fund range, UK wholesale performance has improved with 65% of funds being targeted over one year and nearly 60% over three years. With the exception of a couple of trusts, the performance in the investment trusts over one year was disappointing. However, more recently, we are seeing much better performance in a number of our trusts.

In Pan-European property, the final 2008 score for funds with market or peer group benchmarks were 20% and 49% over one and three years respectively, in line with our previous estimate. This performance is disappointing and to a large extent was due to the adverse impact of market conditions on absolute return funds. Given current market conditions, we do not expect to see an improvement in these funds in the second half of 2009.

New Star's range of funds, which we only acquired on April 9, have been excluded to the short time period they were under our control. However, you can see a core overall picture of 10% and 19% for one and three year performance. Encouragingly, under our ownership, the New Star range is now improving with three month and year-to-date figures better at 41% and 34% respectively. With overall good investment performance in most of the key funds, an improving performance in hedge funds, we're well-placed to take advantage of the returning investor appetite.

Looking into the investment performance in a bit more detail, this next slide shows you our 20 largest funds for assets under management and their performance. The Henderson International Opportunities Fund continue to deliver top quartile performance. This is a fund that we sell in the US mutual fund range. This fund experienced marginal net outflows in the first half, but more recently has seen good flows and is now in net inflow for the year.

The Pan-European Equity Fund run by Tim Stevenson has an excellent performance track record and we saw net inflows in the first half of 2009. In fixed Income, the All Stocks Credit Fund managed by Philip Payne has delivered top quartile performance over one, two, three, and five years.

Management of the New Star UK Property Unit Trust has recently been taken over by Mark Carpenter. Mark has a proven and consistent track record and this, together with support from the existing Henderson property team, will benefit investors in this fund. There are some promising signs that the UK commercial property market is close to bottoming and the fund is well-positioned to exploit the future long-term growth of the UK property market.

Redemptions from this fund have slowed recently and we've seen valuations stabilize. The general feedback from our sales team is that more investors are showing an interest in property and asset class. The New Star European Growth Fund managed by Richard Pease and Simon Rowe continues to perform well and we've seen positive net flows into this fund into the first half of 2009.

Our UK Wholesale Fixed Income Funds continue to benefit from net inflows in 2009 due to strong and consistent relative performance of the funds against their peers. The Henderson [Preference] Bond and Strategic Bond Funds run by John Pattullo and Jenna Barnard have been performing well and had positive net flows in the first half. You may even have seen in the press that their Strategic Bond Fund recently surpassed GBP500 million after launching in November 2003.

If I move on to performance fees, at the beginning of the year, we anticipated this would be a more challenging year in which to generate performance fees. Those funds with absolute benchmarks, so the hedge funds or funds with relative benchmarks that also require a positive return like our Horizon funds and some of our investment trusts, would therefore not necessarily generate performance fees similar to those seen when market levels were higher.

Although performance fees are generated across the business, performance fees, as expected, were much lower in the first half of 2009 compared to the first of 2008. Notwithstanding this, it is pleasing to see an increase in the period for institutional clients predominately from our fixed income team. The market outlook is improving and with good investment performance in some of our key funds, we expect to continue generating performance fees.

To help you get a sense of where we could potentially earn performance fees, we provide a more detailed breakout of performance fees on the next slide. So looking at this slide, just under half of our assets have the potential to earn performance fees. This is down from over half last year. On the hedge fund side, around two-thirds of the funds or assets under management currently are, at the end of June, at or above their high watermarks. And since the half year-end, this has moved to around three-quarters today.

In the case of Horizon Investment Trust, less than 10% respectively are at or above their high watermark. This is driven by the needs of the fund not only to beat their benchmarks, but also to post a positive return since the last performance fees were earned. The bulk of these funds are equity-related and returns will need to be restored to mid-2007 levels to move back into performance fee-paying territory. None of our property funds are currently at or above their high watermarks. However, in institutional, we have over half of the assets able to attract performance fees now.

If I move on, looking at the flows, I won't spend too much time on this slide as we covered the first-quarter flows and movement in our May update and the second-quarter flows and movements in the July update. Overall, assets under management increased by GBP3.5 billion from GBP49.5 billion at January 1 to GBP53 billion at June 30. This includes GBP8.1 billion of New Star assets we took on at the start of April.

The net outflows from our higher-margin business in the first half were predominantly from New Star funds we expected at the time of acquisition. The net inflows of GBP0.5 billion into our lower margin institutional business would have been GBP0.2 billion higher if New Star's institutional mandates were excluded.

In addition, given industry conditions, we've seen valuations in property and private equity funds continue to fall. These negative market currency movements, together with negative currency and market movements elsewhere in the business, resulted in unfavorable market and foreign exchange rate movements of GBP1.7 billion in the first half.

Since the end of June, we have seen continued net inflows into our Horizon Fund range and encouragingly, the US wholesale has now turned positive, which means flows in 2009 are currently net positive for that range. Daily flows in UK wholesale remains subdued; however, in line with what we said on July 16, the overall trend in UK wholesale flows is improving. We've seen positive flows in our hedge fund range since the half year and we expect to see this continue as clients complete due diligence.

New Star had outflows of GBP0.1 billion in July relating to hedge and property funds, which are included in our previous notifies outflows. The remainder of the negative pipeline is largely private client money.

In the institutional business, we have net unfunded wins of GBP0.9 billion as at the end of June with GBP0.1 billion of that funded so far in the third quarter. The Pearl pipeline remained unchanged from previous updates; however, property has come down to GBP1.6 billion following a recent review by management given the prevailing market conditions. We're selectively investing in this pipeline and expect an increase in the pacing investment towards the end of 2009 and into 2010.

Turning now to the business outlook. Overall, although earnings for 2009 will be more challenging than 2008, we are encouraged by recent improvements in market conditions. Equity markets have improved significantly since their lows. Pleasingly, if you are looking at medium-term trends, market such as the FTSE 100 have now started to show positive momentum. This is the first time since late 2007.

An increasing money supply and lower interest rates is helping to offset the sharp decline in industrial output. Supported monetary policies have also helped corporate bond yields to contract, especially on financial debt. Those spread still remain wider than what was seen just 12 months ago.

In property, we are seeing a stabilization in the UK market. For example, the New Star UK Property Fund has seen valuations stabilize these last couple of months and in Europe, yields on office and shopping centers are starting to show signs of stabilizing. All of this has led to investor demand improving and given our competitive products and good long-term investment performance track record, we are well-placed to satisfy this demand.

The New Star deal has helped accelerate our strategic plans in the UK retail space and has overall strengthened the business. Our focus is on generating profitable organic growth, but where we see opportunities and attractive prices to extend our product range and build marketshare, we are able to take advantage of these. The Board has declared an interim dividend of [1.85p] per share, the same as the interim dividend paid for 2008. It has made this decision in light of the improving outlook for markets, the continued underlying strength of the business, and progress in generating new assets and clients.

Finally, this is Toby's last set of results as CFO. As we announced on July 16, Toby has decided to stand down as CFO from September 1 and will be succeeded by Shirley Garrood, previously our Chief Operating Officer. On behalf of the Board and the staff at Henderson, I would like to thank Toby for all his work and hard effort over 17 years and I'm sure as shareholders, you've also been well-served by his hand on the tiller at many times. So thanks a lot, Toby. And with that, I will hand over to questions.

Good morning. Carolyn Dorrett from UBS. It sounds like the fund flow picture has improved since the end of June. Can you give us more color in terms of where those high-margin fund flows are going into, both in terms of assets classes and in terms of actual funds? Thank you.

Thanks. I think in terms of the fund flows, some of it is a continuation of what we're seeing in the second quarter anyway and some of it is an improvement. If we take the investment lines, the US mutual fund business has definitely seen an improvement towards the back end of the second quarter, so May and June were good months for that and that has continued and probably accelerated in July and August. So that business, which was in net outflows for the first half, is now in net positive flows.

In the Horizon Fund range, flows there tend to be more lumpier. Overall, we had a very good first half. Anyway, that continued with July and so far in August, we're net positive flows for there. I would say that is consistent with what we are seeing throughout the year rather than completely different.

The hedge fund side of our business was hit hard even in some of our very good performing funds earlier in the year just through the redemption cycle that a lot of fund of funds and a lot of clients had done. Had really sought to restore their own cash in anticipation of client redemptions. And future funding was taking a lot longer because the due diligence process has clearly been a lot more stringent process now and given the sort of Madoff affair. What we are seeing is flows, their modest, but positive flows coming into the last two months.

But we also have fairly high visibility given the due diligence process that that will continue and possibly increase from here. So that business does appear at the moment to have turned the corner and also the investment performance of our funds. As we said, 100% of our funds are ahead as of June and three-quarters of our funds are at or above their high watermark. So they have performed very well in that sense. I think the average Henderson fund is up well over 20% for the year and Stephen Peak's fund for example, which was high profile last year, is up closer to 100% as we speak today. So he's recovered all of the losses he had last year plus more so far. So the hedge fund side of the business is looking good.

The fixed income side, really we've got a large unfunded pipeline, which we've sort of put there. In terms of RFPs at the moment, they're being slowed just because it's July and August, but the win rate we've had is very high and we've been very supportive of that.

Other areas of the business, in the UK, I would say the UK probably being more subdued more just because of the time of year it is. It's consistent with sort of trends we saw in June, which was improved performance for New Star, but still seeing outflows of around sort of GBP1 million a day. I think in June, we said it was GBP1.3 million a day of outflows and that's sort of not inconsistent with what we're seeing now, maybe a slight improvement at the moment.

The Henderson funds continue to perform quite well off that and the New Star sales team and distribution arrangements have benefited the existing Henderson range. So the net effect is actually positive, but only sort of I would say marginally in that sense. It's not -- it hasn't yet delivered significant growth there, but it has certainly stabilized from that position. In property, there's nothing in the second so far -- it's a long-term sales program. It's the pipeline that we believe we'll begin to invest. So I think that probably covers all the asset classes.

Andrew Mitchell at Fox-Pitt. A couple of questions. I don't know if you can give us a specific overall current AUM figure, but just out of curiosity. And then on the variable costs, you sort of -- I wondered whether your financing, that is going to go up, which is fairly obvious if the market keeps going up. I was wondering if you might actually have to move that up ahead of the market in order to keep stability in the teens.

In terms of AUM, no, I'm not going to give you that. Nice try. We'll update you in September in our October IMS. With regards to variable costs, you can see that on slide 6 that pretty much the variable cost line has come down in line with total income line. That's partly linked to the schemes and the way we have configured the business and the model here in terms of remuneration. That would mean as you see improving trends in market for example leading to higher income levels, then you'd expect the variable line to move higher in proportion with that. And so definitely you will see that.

In terms of compensation ratios staying at 47, whether that will need to edge up, I do expect the competitive position is probably improving in terms of the job outlook. We've seen nothing at this stage to indicate that we are losing staff in that regard, though I'm not being complacent on that sense. It's actually probably more where you are seeing any pressure at the moment in the investment banks where there definitely has been a change in mentality from predominately the large investment banks, which are hiring and being a bit more aggressive about what they are trying to do. That hasn't yet played back into our business at this stage, but I wouldn't sit there and say that we are anything but. They're being complacent on that and it's something we need to keep our eye on.

Hi, it's Hubert Lam from Morgan Stanley. Quick question on management fee margins. I think Toby said that management fee margins for the group are expected to be higher in the second half because of New Star. In terms of what is the trend for the underlying Henderson standalone management fee margin, is that -- where is that going? Thanks.

Yes, well, there is quite a good analysis, Hubert, as usual in the interim report and accounts themselves, which hopefully you've got. So we include an AUM table there, including flows and management fees half on half. I mean they've all been pretty resilient in the heritage Henderson book with I guess the main exception of scraps of products, but [stretcher] products are a slightly peculiar animal when you get senior and junior management fees. We've taken the senior into the P&L, but you only get the junior if you pass all your resilience tests. You can fund distributions to clients and there's enough left over to pay the junior fees.

So we've had to forego those in the period, but that's been compensated by the advisory fees from the structured products team and transaction income, which has helped towards that 20% increase their half on half. But otherwise, when you look at the numbers, allowing for market movements, the actual rates, the margin rates are very robust.

Okay, and you expect that to be the same trend in the second half of the year?

Yes, we will see more of the New Star dividend come through. Andrew indicated the current run rate of New Star management fee and when we did the deal, I think we said that equated to that. 60 odd basis points of AUM and that remains intact.

I think in terms of the points you're making that this issue you've got is, firstly, the business we put on on the back end of last year and beginning of this year, like in the first quarter, was predominately fixed income and cash, so that would obviously have impact on the margins. The business we're putting on now that you're seeing in terms of high-margin areas -- hedge funds and the wholesale flows and for example Horizon in the US -- are predominantly all equity-biased. And with equity markets going high in terms of the fee rates on each of line of business has been relatively stable.

The mix will change (technical difficulty) the market levels and the asset growth, so it's been declining over the last 6, 12 months. Will it be the same going forward, it really depends on whether the markets sustain at levels they've got to and whether the current inflows we are seeing continue. So you will see a reversal of the decline you've seen in the last 12 months at the management fee level and the standalone Henderson business. Notwithstanding, then you add in the New Star business, which was higher and therefore, you are seeing an improvement in the management fee margin.

Catherine Heath from Altium. Two questions, if I may. First of all, in terms of costs, you obviously indicated that you've done better than expected perhaps in H1 on underlying costs. Can you update us on full-year guidance, take into consideration also higher guidance on the transaction performance fees, please?

And then secondly, Toby, in the past, you've kind of given us an indication of the market effect on your revenue line. And I just wondered on your end of June assets under management if you could give us the same sort of update, please.

Post-New Star, the rule of thumb is every 15 points move in the FTSE 100 as a proxy for our market exposure is not -- it's not scientifically accurate or anything like that, about GBP 1.5 million on annualized management fees. And on your former point, I'm not giving you full-year guidance on the operating expenses, but suffice it to say that the pain that we have taken over the last 15 months or so on heritage Henderson and the good work we've done on New Star to get the cost space down to 38% in the first quarter. We don't want to give that lightly. We have flagged the point about variable, staff costs subject to -- comp subject to market recovery and revenue improvement. Otherwise, we continue to look at the expense ratio as the main means of controlling the overall cost base rather than a monetary value on the cost base.

Steve Keeling, Singer. A very boring question, actually. Your debt instrument -- initially, you're seeing your floating rate notes. I don't know where they are trading at, but probably about 15, 20 discount, something like that. They mature in 2012. When are you going to start to think about how you replace that and at what cost?

Well, we are always already thinking, even though it's sort of three years away. It was a good instrument. I think with the benefit of hindsight, we did it at the perfect time, great pricing and covenant-lite. Obviously the world has changed somewhat. If we were trying to renegotiate now, it would be challenging, but I think the consensus view of macro in May 2012 is more encouraging. And we always wanted the option of repaying or refinancing. And my own personal view is providing the business could generate sufficient cash flow to fund some immediate amortization on that (inaudible). The reason why we couldn't roll the balance on good commercial terms. But it's one of the items on the list, but it's not immediately pressing.

Sarah Ing from Singers. In terms of acquisition opportunities or further developments, what particular asset classes would catch your attention?

The first thing I'd say is the acquisition of New Star was probably about the size that we would like. New Star represents over GBP100 million, 20% of the group at the time. It filled a strategic gap for us, particularly in the UK retail marketplace. Areas of interest to us, I think the property business, despite the difficult conditions, is performing very well within that. And I think there are a lot of other businesses that aren't performing as well.

So the ability to pick up some -- thick-skinned our position and market position in that and not just here -- we're probably strongest in our property business in the UK and Europe and there are opportunities in this market. But actually we would be looking more to expand our US business where we only have about $5 billion. If we could really increase that, that would be useful. But also in particular Asia, a property where we would like to have ambition. So property certainly would be something standalone that we would like.

I think the retail side that we got, we quite like the retail business and it's performing as we anticipated. So clients are starting to get a bit more confidence and coming back to the mutual fund or investment unit link sort of products in that sense. Either expanding either in the UK could be a very good platform, but just any really parts of our business, Asia, US, or Europe would be of interest. So certainly that would be there.

Hedge funds, we had always sort of been a bit careful of over the last sort of 6 to 12 months just because the outlook was so just bleak and the visibility was so poor. As you start getting more visibility to that, bringing on investment teams to expand that, so we brought on the Fortis currency team to write a hedge fund for us and they are up 20% year-to-date in terms of the investment performance. They're running several hundred million at the moment and they can run a lot more, so that's a very good thing.

And [Pongo] has continued to do very well in terms of investment performance. So adding things like that would be useful. So I would say that probably gives you -- I think it would be more smaller scale. I would say on investment, equity markets have rallied quite strongly from their March lows. I think expectations of some vendors have increased exponential ahead of equity market valuations in that period. So discussions that were going at those points were very fraught from the vendor side have certainly changed in terms of perceptions. But I still think deals will be done at reasonable incentive prices. But there has been a more prolonged period in some of these discussions. But expected to be the more small-end side than anything large or transformational and investment teams, you shouldn't rule out that we will hire or take on board.

Katrina Hart, Canaccord Adams. On the dividend, I must say I wasn't expecting you to maintain the dividend and maybe I misunderstood your dividend policy. I thought at the time of your prelims you said that although historically you had increased the payout ratio by 5% per annum, we shouldn't expect that in the current environment. Could you just remind us about your dividend this year?

I think it's fair to say that we are in some relatively extraordinary times in terms of the business and the dividend policy isn't being totally articulated in terms of payout ratios or where it would be. We're looking at both the capacity of the business, the needs of our shareholders, and we need to remember we have 125,000 shareholders, of which a lot of them are retail-based and they appreciate the income you get there. And also the fact that we are in the business of looking at moment and it's a materially changed outlook and then it certainly looked even a little less so four or five months ago.

So I think what we have said today is we have maintained the interim dividend. We will update you on the full year dividend and I expect at the time the full-year dividend will give you a greater confidence to the path of dividends, but we appreciate and understand shareholders' desire in terms of how they see dividends being an overall part of their return from the business and if we feel we can maintain that, we have some say today.

Good morning. It's [Andy Garrard] from Citigroup here. I was just wondering if you could provide a bit more detail about the gross sales at New Star by funds. Clearly, short-term performance has picked up their and unfavorable markets encourages people not to remove their money, but with the existing branding as it is, I was wondering if you could talk more about the platform's ability to attract new money, particularly if equity markets do continue to rise.

Sorry, I haven't got the details by funds in terms of gross, but certainly the reason that we are seeing an improvement in the business was that the outflows sort of returned to a more normalized level in sort of May and it stayed pretty constant at that. What you'd see is the improvement in the gross sales in the New Star funds. The main areas that you've seen that in have been Richard Pease's Pan-European growth fund and also Guy de Blonay's Global Financials Fund. They'd probably be the biggest areas in that.

Property, UK properties, seeing gross flows and they are probably the three biggest areas. Some small ones in things like India and the like and some of the bond funds, sterling bond for example, which has had a very strong recovery from the lows, has seen some flows. But I haven't got all the details, but I definitely gave you a flavor anyway.

(inaudible).

Okay. We will just take some calls from Australia, if the operator can now put through those calls.

Arjan van Veen.

Thanks, gentlemen. The first one, Toby, on your comments around transaction and performances, you gave guidance greater than five. It's shifting in the first half and then there are comments around hedge funds, seem to indicate very strong performance. Is there something there with when the hedge fund performance gets paid or is there some abnormally high transaction fee in the first half that you're worried about?

Well, actually, normally on hedge funds, the bigger contribution comes through the first half and the second half because it's a function of year-ends. And although we have a spread at year-ends in the hedge fund franchise, the bigger funds tend to be year-end June. We do have a few in September and December, but I think the new guidance is really a function of the visibility that we have currently across all the asset classes. And as you saw from the new slide, there's a lot of optionality in our pay fee book these days and so there are a number of other things there that we have some visibility of at this point, which gives us confidence to make the statement we made this morning.

But the strong hedge fund or the current hedge fund performance will more likely come through in the first half?

That's correct. The majority of those funds would be June year-end, which they will either have paid a modest performance fee, which you've seen in the results here, or some of those as I said, some came -- are now at the high watermark today that weren't necessarily there at the end of June. The expectation, if they are to continue on the trajectory and deliver performance fees, that will be earned in the 2010 year.

Okay, and Andrew, on the institutional pipeline, can you comment firstly on sort of how committed that GDP0.9 billion of inflows is and roughly what type of asset classes?

It is nearly all fixed income and our fixed income team has done a very good job. It's a cross from credit-related funds to looking at distressed debt and the like where we've been very successful. And there's some small cash mandates in there as well. They are all committed. Because of the nature of institutional, you tend to win the business and then it takes two or three months for the transition to come through. So I'd expect the bulk of those to have funded by the end of the third quarter or at least very early in the fourth quarter.

Okay, and finally if I may, just on the costs out within Henderson, (inaudible) new stuff for the time being, is there any -- if we look at the first-half cost base, is that indicative overall going forward or is there still a bit of the initiatives you've been undertaking to come through in the second half?

I think we had the question earlier actually, Arjan. We don't anticipate any more sort of wholesale cost cutting at this point. That's behind us. We're sort of match fit now for the market recovery. We have --.

But it's not (inaudible) in terms of what came through the first half and will there be more to come through in the second half?

It should be fairly evenly spread, caveat, variable staff count, which was clearly subdued in the first half, but whatever happens now will be a function of the recovery.

But also the New Star costs you only had there for one quarter, which allowed for two quarters in the second half. So actually, Arjan, you just (multiple speakers). Most of the cost savings we identified and mentioned at our full-year results had actually been implemented pretty much by January. So the full-year benefit is being felt.

Thank you.

Nigel Pittaway.

It's Nigel Pittaway here from Citi. Just a couple of quick questions if I could. First of all, the registry fees on New Star that have contributed obviously in the transaction fees, those are basically GDP5 million per annum of other income that you flagged in the earlier presentation. That's basically all that is. Is that correct?

A chunk of that GDP5 million. There are a couple of other items in there before, but it's the largest component, Nigel, yes.

And that's split fairly evenly between the two halves?

Yes, it's like an annuity stream ready off that book.

Okay, that's fine. Then just a quick question. Obviously you've taken quite a big sort of devaluation on the pension scheme asset in the first half. I know you've provided three reasons in the release for that. I was just wondering is any one of those reasons more prevalent than any of the others?

Yes, well, I think inflation, I have higher expectations of long-term inflation and the reduction in corporate bond rates that we use to value the liabilities at least for accounting purposes accounts for that half of the reduction in the surplus. And then you've got a few other factors included in investment performance. But you know, we should still -- don't miss out on the fact we are still GBP100 million in surplus, albeit based on accounting measures rather than funding. As we say in the document, we are discussing the funding position with the trustees at the moment because we're working through the triangle evaluation as at the end of last year. But even that picture looks satisfactory. So I don't think there are any concerns about the pension fund. We did the hard work two or three years ago and we are seeing the benefits.

Sure.

(Operator Instructions) Andrew Hills.

Andrew Hills from Wilson HTM. In the July update, you advised that the ownership of the New Star institutional international equity manager would transition from the Henderson to the principle of that fund. Can you firstly give us an update of the transition of that ownership of that fund? And also when you talk about the revenue and expense performance of the New Star acquisition, are you including this fund?

Okay, we'll take the second one first. Yes, we are. At the moment -- on your second -- your first point about the transition, as we said at the time, there was a sort of buyout principle that we'd take depending on the growth and the achievement of the profits of that business. That will -- that would probably take, in our expectations, somewhere between five and seven years. So given it's only a month since we've updated, there's been limited movement at this stage, but the business is stable, which before it had quite large outflows. Performance has been okay. (inaudible) are improved.

Certain clients have been very much reassured by the structure we've put in place and several clients have come actually over and visited the team in the premises here at Henderson and have been very impressed with the setup. The support they get from Henderson, but also the independence they have in regard to the business and see it is actually providing exactly the framework that they expected. So I expect that business to -- it's a relatively small business in terms of contributions because of its margins. Its margins are around 30 and 35 basis points, but it's a good business that will continue to grow and offers our clients a very good exposure to international markets, which the US continues to sit there and put money to work at.

Okay. Thank you, Andrew.

Kieren Chidgey.

Kieren Chidgey, Merrill Lynch. Just had a follow-up question on the cost composition in the first half '09. You flagged the Henderson pre-existing business down 17% on basic pay. By my numbers, it implies somewhere around GBP5 million of costs for New Star in the second quarter, which obviously if you annualized is about GBP20 million for the year. It just seems a bit at odds with what you said in July that you are going to hit that GBP20 million run rate at the end of June. So just wondering if you can comment further on that.

Well, we're not sort of breaking the thing out as a separate operating segment and giving you the P&L, Kieren. But the first quarter was a slightly up quarter, so I can't and I won't tell you whether it was GBP5 million or not. But we got down to the 38% with a flat from sort of July 1. So it was somewhat more messy than it might seem, but all we will say is what we said already, really, that we're pleased with the progress of the integration. We've hit the target we set ourselves six months ahead of time.

As I indicated in July, there may be a marginal improvement in that expense ratio going forward, but much -- well, virtually all of the quick wins have been done. The bit that we haven't yet done is the back office, but that will take a bit of time. And then maybe some marginal benefit there, but 30%, 38% is the right ratio to think of. But I'm not really going to be drawn much further than that.

All right, thank you.

[John Hegarty].

Thanks. John Hegarty from RBS. A couple of questions, if I could. Firstly on the property, just looking at slide 24 looking at UK closed-end funds, it seems to have fallen a long way. It was wondering if you could just explain what's happening there considering they are closed-end funds or those funds just run out and people haven't reinvested the money or what might be happening there?

The main reason for the fall there is market movements, so you see in the US that was a market movement. In the UK, there was a wind-up of a fund. We're expecting that as well as the market movement -- the shopping center fund was wound up in the first quarter and also there was quite severe declines in the first quarter in terms of market movements.

So trying to look through the fund flow details, so you see the market movement for property in the UK here, you saw that second-quarter flows down or the combined UK and Europe of GDP5 billion, up GBP0.5 billion coming down through market movements and in the US, the GBP0.4 million, which it broadly represents the declines that you are sort of seeing there.

Thanks, just on a second question. In terms of the timing you're expecting some of these things to invest, you've talked about a pipeline of 0.9 and then two new funds, Decker and the central London office funds, 0.5 between them. How quickly (inaudible) invested in the second half or are they going to be spread out over a longer time period than that?

UK buyers fund, which is only a much smaller component of the total pipeline, we are trying to put to work at the moment given the comments we make in the UK. Europe and in particular the US, we also remain a bit more subdued about the timing. Europe is, in some pockets, getting closer to where we are comfortable to invest. The US actually seeing some quite high declines recently, playing catch-up to what I would say around UK sort of evaluation and norms. So if that continues, then we will be getting -- will be looking to invest in the US quicker than our expectation, but the US probably wouldn't be until 2010. UK would be down for the end of the year if we can find the right properties and Europe would be sort of beginning to be put to work towards the end of this year and into 2010.

Thanks, and the GDP0.7 billion of fixed income and cash, when is the -- presumably that would be put to work pretty quickly?

Yes, the pipeline on the institutional side and the fixed income side, they are a different property that you tend to have a mandate and then when you put to work, you earn fees. Often the funds in the fixed income will either come over as cash or they may even come over as an existing profile that we then transition to where we want. So when they come on board, they will then immediately be accretive to the business.

Great, thanks.

We have no further questions registered on the telephone.

Thank you. Are there any questions, further questions here in the audience? If not, thank you all for attending. If there are any follow-up questions, obviously you can contact Mev. Thanks very much.