Janus Henderson Group PLC (JHG) 2010 Q2 法說會逐字稿

If we make a start. So good morning and good evening to all those who are listening in Australia. Thank you for joining us today as we present Henderson Group's half-year results. In addition to the information in the presentation, there's also the Interim Report and accounts, which we lodged earlier today. Both of these are available on our website.

I will start by talking about our business performance and progress so far this year. And then Shirley will cover the financial results in more detail. I'll wrap up the presentation with our strategic priorities and outlook for the rest of 2010. And at the end of that we'll be happy to take questions.

Market conditions were better in the first half of this year compared to the same period last year. However, the lack of policy unity within the Eurozone, and fears that this could derail the global economic recovery, meant that markets were volatile, particularly in the second quarter, which knocked investor confidence. We continue to focus on client needs, no matter what the market environment is. Our diversified business, broad product range across all asset classes and competitive investment performance means that we're able to capitalize on opportunities even in such circumstances.

We continue to restructure our capabilities with the needs of our clients foremost in our decisions. An example of this was the transferred International Property Fund on August 2 to Aviva Investors, where we saw a better overall proposition for the client base, enabling the fund to benefit fully from the opportunities currently present in the marketplace.

We had net inflows of GBP1b in the first half in our higher-margin funds. And I'll go into more detail on flows later on. And notwithstanding the volatility in markets and the fragile investor confidence, Henderson delivered an excellent set of results, with revenues up 50% and underlying profit up 80% compared to the same period last year. Our skilled sales and investment teams and improved brand awareness have all contributed to this result.

We are pleased with the success of our re-branding exercise. In the UK retail market, Henderson has retained eighth position over the past six months for advertising awareness. This is a positive sign after dropping the New Star name and demonstrates that we're moving in the right direction. Awareness levels remain significantly above levels prior to the New Star acquisition.

As most of you are probably aware, earlier in the year we looked at acquiring certain businesses of a US-based fund manager, RidgeWorth Capital Management, the asset manager owned by SunTrust Banks. Although this acquisition met our strategic criteria, we could not reach agreement on terms.

On this slide we show the key financial highlights. The improved market conditions, our competitive long-term investment performance and higher-margin flows helped the Group generate an underlying profit before tax of GBP48.5m. This is up nearly 80% from the same period last year. Our investment performance remains strong, with 62% of our funds meeting or beating their benchmarks over one year and 63% over three years. Our operating margin improved from the first half and remains stable compared to the second half of last year, notwithstanding the costs incurred when looking at RidgeWorth.

The increase in our compensation ratio in the first half of this year compared to the first half of 2009 is due to an increase in variable compensation associated with increased revenues and higher performance fees earned in the period. However, our compensation ratio remains flat compared to the second half of last year.

Assets under management were 3% lower as net inflows of GBP1b into our higher-margin business were offset by outflows from lower-margin businesses, Pearl, and from the negative market and foreign exchange impact. Earnings per share based on underlying profit increased due to higher earnings. And the Board has declared an interim dividend of 1.85p per share, unchanged from the first half of 2009.

On this slide we illustrate our five financial key performance indicators over the past two years. We have made good progress on all fronts. I won't spend too much time on this particular slide as I will cover investment performance and fund flows in more detail on the next slide, and Shirley will go into more detail on margins, the compensation ratio and earnings per share later on.

The first of these is investment performance, which you can see here. On this slide we show you the asset-weighted investment performance of that fund. And, as I already mentioned, the percentage of assets at or exceeding benchmarks over one and three years was 62% and 63% respectively.

Our fixed income and equity funds continue to perform strongly with one-year and three-year performance of 72% and 76% for fixed income, and 69% and 70% for equities. Following the consolidation and re-branding of the UK Wholesale range, three-year investment performance includes legacy New Star funds. Excluding these funds, 87% of fixed income funds and 75% of equity funds would have been at or above benchmark.

Horizon performance has improved over the past six months and we have excellent performance over one and three years, with 80% and 87% of assets respectively outperforming.

UK Wholesale performance has improved, with 91% of assets outperforming over one year. Over three years to June, our numbers have been adversely impacted by legacy New Star funds, which we now include in both periods. Excluding these funds, 80% of UK Wholesale assets will have outperformed.

The US Wholesale fund range has maintained its excellent long-term track record, with 98% of assets outperforming over three years. However, one-year performance is disappointing, with 15% of assets outperforming as the Henderson International Opportunities fund, representing approximately two-thirds of the US Wholesale assets, underperformed in this period.

Hedge fund performance suffered in the first half of this year, largely due to poor performance in two of our largest hedge funds. And this has dragged down the one-year asset-weighted numbers. However, on average, our hedge fund returned 5% in the last 12 months. And we're only down 1% year to date, outperforming major hedge fund indices.

In the Institutional business, all fund classes continue to perform well over one and three years, with 100% of enhanced index funds outperforming over one year and 70% of fixed income funds outperforming over one and three years.

We are pleased with the recognition and awards we have received, notably in fixed income. The investment we have made in this team since 2005, when David Jacob joined, is bearing fruit. And we were awarded Fixed Income Manager of the Year by both Professional Pensions Awards and Pension and Investment Provider Awards in 2010. We have also received a number of rewards for our investment trust and retail fund ranges. And there is a more detailed listed in the appendix of this presentation.

The 2009 IPD Annual Benchmarks were published in the first half and were the same as the Group's estimate at year end. The 2009 scores were disproportionately impacted by falling markets making it difficult to outperform absolute return benchmarks. We're expecting a significant improvement in our one-year numbers from property when the next benchmarks are published. However, it will take a bit longer to see an improvement in our three-year numbers.

New Star Institutional Managers performance has improved significantly during the period, with 99% and 69% of assets outperforming over one and three years respectively. With overall good investment performance in most of the key products, we're well placed to capture client demand.

We'll now turn to performance fees. At the beginning of the year we anticipated that this would be a more difficult year in which to generate performance fees. As it turns out, performance fees are significantly higher compared to the same period last year and comparable with the second half of 2009. Institutional was again the main contributor in the first half of 2010.

As previously flagged, those funds with absolute benchmarks or funds with relative benchmarks that also require a positive return are not generating performance fees at historical levels. However, performance fees in institutional, hedge and Horizon were higher than the first half of 2009. The performance fees in property were lower, as expected. And performance fees aren't expected until the property market gets back to the 2007 levels.

This slide illustrates the diversity of the business and significant contributions for our institutional client base, predominantly driven by our fixed income team's performance. We expect Henderson will continue to earn performance fees. And to give you a sense of where we could potentially earn performance fees, we've provided a more detailed breakdown on the next slide.

As you can see here, half of our assets have the potential to earn performance fees. And this is moderately up from the end of last year as a result of more institutional clients looking to pay performance-based fees.

On hedge funds, around 35% of funds were above their high-water mark, rising to 90% if you include those funds which are within 5% of their high-water mark. In the case of Horizon and investment trust, 45% and 20% respectively were at or are within 5% of their high-water marks as at June 30. As I'm sure you'll recall, these funds have to beat their benchmark and also have to post a positive return since the last performance fees were earned.

If we now move onto fund flows, overall, asset under management decreased by GBP1.7b, from GBP58.1b to GBP56.4b as at June 30. This was a result of outflows from Pearl of GBP1.6b, a negative market and foreign exchange rate movements of GBP400m, offsetting inflows of GBP300m in the rest of the business.

Looking at flows in a bit more detail, we had net inflows of GBP1b into our higher-margin business. Of particular note was our Horizon fund range, which had GBP600m net inflows in the first half, with particularly good sales in our Global Technology and Pan-European Equity funds, which have performed strongly.

Hedge funds saw GBP200m in net inflows in the first half of 2010. We have seen good inflows into our Japan funds. But we also had some good traction in our credit (inaudible) and credit long/short funds. We have noted that investors who've previously only dealt with boutique fund managers are now interested in dealing with Henderson. That said, investors' time horizons before committing funds have increased. Previously, investors took an average of four months from the initial meeting to making an investment. The [dry] period has extended to nearer nine months.

On the regulatory front, we continue to monitor developments in the AIFM directive. But it's still a little too early to know exactly what this could mean for us.

On properties, we saw GBP200m of net inflows in the first half. There have been positive market valuation movements across most property markets during the first half. However, in the second half we expect the UK and European markets to stabilize. The property team continue to win new mandates, but it is selective in determining those properties if they choose to invest in, nd given the shortage of good-quality investment-grade properties on the market at present. While this is good for performance, it does mean that utilization of current pipeline of GBP1.4b will continue into 2011.

There has been a positive shift in our UK Wholesale book, not only in terms of sentiment, but also in terms of net inflows. We are increasingly being recognized for our fixed income and multi-manager capabilities. In the first quarter, flows were flat as a result of the reopening of the International Property Fund and a client retreating from the UK, whereas in the second quarter and the third quarter to date, if we exclude the International Property Fund transfer to Aviva, flows are net positive. The funds capturing most of these flows include strategic bond, European special situation and our multi-manager range of funds.

We will continue to invest in our UK business and build on our initial success of our UK marketing campaign. There are some regulatory issues to keep an eye on, notably the Retail Distribution Review. The next update on this review is due in September and we should get more clarity then on the implications for our business.

In the US there has been a trend moving out of equity into domestic bond. And to the industry this year, equity fund categories are in net outflows generally. Despite this headwind it is pleasing that we have been in net inflows throughout the period, a testament to our relationships and our funds. We are looking to broaden our product range to utilize the experienced distribution team and platform we have built there, and this was a primary driver behind our interest in RidgeWorth. We continue to invest in this area and focus on the performance of our fund range. Our products are well-regarded and should benefit when flows return to international products.

The Private Equity business has seen improvement in the value of the infrastructure portfolio it manages over the last six months. A number of initiatives were successfully concluded in 2009. And during 2010 the team has continued to implement further initiatives that should contribute to rises in portfolio values. Other parts of the Private Equity business continue to perform well.

In our lower-margin business, institutional was stable. Institutional inflows in the first quarter were offset by some lumpy outflows in the second quarter, where a few clients have restructured as part of their [management] diversification plan. Despite performance being above benchmark for one and three years, they have reallocated some of their funds. We continue to receive more buy ratings and currently have a net pipeline of around GBP300m.

New Star Institutional Managers remained in net outflow with GBP500m out in the first half. But, as I mentioned earlier, performance has improved. While Pearl continues to withdraw assets, the agreements we've had in place since June 2006 ensure that these withdrawals will not have any material impact on future revenues.

If we move on, this slide shows the fragility in client confidence over the year since June 30. Here we show you our monthly flows to the wholesale fund ranges and to hedge funds. Both March and April show positive flows across all three range -- all these ranges, but have clearly changed in May and June as markets reversed. The Horizon flows, though volatile, have seen excellent net inflows. The other category to highlight is UK Wholesale, which, if you were to exclude the impact of the reopening of the International Property Fund in February, would have been net positive for five out of the six months this year.

Moving forward, then we look at the fund flows and the pipeline. Post June 30, we have seen good net inflows into our UK Wholesale fund range. And we are currently net positive, excluding the International Property Fund. In the institutional business we have net unfunded wins of GBP300m as at June 30. The property pipeline remains unchanged at GBP1.4b as at June 30. And we've already invested around GBP150m since then. Pearl currently has notified withdrawals of GBP1.4b. But, as you probably know, there's no material impact on our revenues.

I'll now hand over to Shirley to take you through the financials in more detail.

Thank you, Andrew. I'll focus on the underlying profit before tax on this in the next few slides and talk more about tax and EPS later. Underlying profit before tax was GBP48.5m in the first half of 2010, 79% higher than the same period last year. This increase was largely due to higher equity markets and the impact of New Star for six months this half-year, compared to three months in the first half of 2009, coupled with improved transaction and performance fees and continued cost control.

Looking at the drivers of total fee income, which include some GBP62m in the first half of 2010 to GBP178.6m compared to the same period last year. Management fees contributed 64% of this increase, primarily due to higher equity market levels in the first half of 2010, the take-on of New Star funds in April 2009, and higher-margin business being won in 2009 and '10. The largest contributors to management fees in the period were wholesale, institutional and property funds.

Transaction and performance fees in the first half of 2010 amounted to GBP41.2m in total. Transaction fees were GBP16.6m, up GBP6.2m, therefore contributing 10% of the total fee income increase, principally due to additional fees on [OICs] following the New Star acquisition, and property fees due to an increased number of transactions. Transaction fees in the second half of 2010 are likely to be at a similar level to the first half of 2010 as a result of recurring fees on [OICs] and our expectations on investing with property pipeline.

Performance fees were GBP24.6m, nearly 3 times the amount recorded in the first half of last year. They represented 26% of the total fee income increase. Andrew's already covered both the largest contributors in the first half of [2000] and the potential for earning performance fees. As you'll note, performance fees remain difficult to predict but, due to their diversity, we're confident that performance fees will remain a feature of our results.

On this slide, looking at fee margins, our total fee margin on average AUM in the first half of 2010 increased by 14 basis points from the same period last year, largely due to higher transaction and performance fees and improving management fee margins following the New Star acquisition. Consistent with this trend and a shift towards higher-margin assets, our management fee margins increased by 7 basis points. Our net fee margin also increased as a result of increased underlying profit.

Moving onto costs, overall operating costs increased by GBP39m, or 45%, to GBP126.6m in the first half of 2010. And I'll deal with employee compensation on the next slide. Investment administration and IT costs increased mainly as a result of taking on New Star funds and staff and some inflationary pressures. Office expenses were higher, primarily due to a business rates rebate we received in the first half of last year, which was not repeated this year, as well as some inflationary type pressures.

Other expenses increased by GBP7.4m in the first half of 2010 compared to the same period last year. GBP4m of this increase relates to our continued investment in the UK Wholesale business, by increased spending on marketing events, promotions and related travel spend. GBP3m of this increase represents aborted deal costs incurred as part of the extensive due diligence we did reviewing the RidgeWorth business.

If we compare operating costs in the second half of 2009 and the first half of 2009, these were only GBP1.5m up, excluding the increase in staff costs and the aborted deal costs.

Can we go back one? The operating margin improved from 25.1% to 29.1% due to an increase in market levels, a full six months of revenue from New Star and the Group's continued cost control. Without incurring the GBP3m aborted deal costs, the Group's operating margin would have been just shy of 31%.

Here we show the trend in operating costs, the red line, compared to total income, the orange line. Within the expense total, if you can see the mix of fixed staff costs, the green line, and variable staff costs, the light-blue line. As expected, with an improvement in markets and as the revenues increased, we saw an increase in variable staff costs and therefore some limited pressure on the compensation ratio, the dark-blue line. This ratio was stable compared to the second half of 2009, but 1.6% higher than in the first half of this year compared to the first half of 2009. Fixed staff costs were only slightly up as headcount was also stable. However, we experienced some salary inflation.

As a reminder, the charge in respect to the amortization of the investment management contract from void property provisions is a consequence of the New Star acquisition.

Recurring profit before tax was GBP41.6m, 76% higher than the same period last year. I'm happy to report we have no non-recurring items in the first half. After tax, the Group made a profit of GBP33m in the first half of this year.

The effective tax rate for the Group on recurring profit was 20.7%, compared to 19.7% for the same period last year. The higher tax is due to a different mix of profit between UK and non-UK and the impact of prior-year adjustments in both periods. We expect the Group to achieve an effective corporate tax rate on recurring profit similar to current levels, although to the extent our profit mix changes substantially and therefore impacts our objective tax rate, we'll give guidance at that point.

Basic earnings per share on underlying profits after tax, for the reasons Andrew already explained, increased to 4.7p from 2.9p in the first half of 2009.

Turning to liquidity, the Group's liquidity position remains satisfactory. We hold cash balances of GBP100.5m at June 30, more cash than 12 months ago, even after paying all the New Star integration costs. Cash has fallen since the 2009 year end due to the payment of annual bonuses and the final 2009 dividend of GBP34m.

The Group's gross debt position remains unchanged at a nominal GBP175m. Net of cash, net debt amounted to GBP74.5m at June 30. The interim dividend of 1.85p per share is per the formula the Board adopted earlier this year, where the interim dividend will be the equivalent to 30% of the total dividend for the previous year. The decision on the final dividend will be taken in February 2011 in light of the full-year results.

As you can see, our gearing ratios remain comfortable and the business continues to generate substantial interest cover.

I'll now hand you back to Andrew.

Thanks, Shirley. In order for us to remain successful, we must focus on developing products and finding solutions that satisfy our clients' needs. Once clients have made the decision to invest in our funds, we strive to exceed their expectations and to continue to deliver top investment performance and client service.

We have good momentum in the business, driven by our performance numbers, and the challenge is to capture this and positive net flows across the business. We have known for some time that the financial merits of the New Star acquisition stacked up. We are now seeing the beginning of the realization of our UK wholesale strategy, which we'll continue to drive forward. We continue to focus on ways to generate positive fund flows, increase our operational efficiency and increase the global footprint of the business.

Overall, our competitive long-term investment performance and diversity of product offering provide strong support for the remainder of this year. Generating profitable organic growth continues to be our primary focus. And we remain committed to providing clients with more valuable investment products and client service.

We are optimistic about the outlook for the market, though expect that volatility will remain high throughout the year as economic news will remain mixed. All in all, Henderson is well placed to grow its existing product ranges in all of our channels and the geographies we operate in.

We remain alert to changes in the regulatory environment and will monitor developments closely as current consultation leads to formal policies.

Finally, we will continue to investigate opportunities to accelerate our strategic objectives. As regard geography, Asia and the US remain of interest to us. And as regard capabilities, we continue to focus on our higher-margin businesses and would like to add emerging markets, domestic US and more in property. There is nothing specific I can talk about today. However, we will continue to review strategic opportunities when they arise.

That concludes the formal part of the presentation and we'll now take questions to the floor. And then I'll hand over to the operator to take to take questions from those on the line.

Good morning. Daniel Garrod from BarCap here. A couple of quick questions, if I may. You mentioned about the good performance track record, but there is a bit of evidence in the one year on the fixed income side of some slippage there. It looks like it's mainly in the lower-margin areas, but I wonder if you could provide a bit of color there and some detail, particularly on the pages about the higher-margin fixed income performance.

Secondly, the flow outlook, the flows in Q2 looks like Horizon accounted for the bulk of the higher margin. And the performance down there I know is very strong. I was wondering if you could provide any color on whether it's clearly been volatile out of Horizon outflows in May, return in June. What are you seeing in July? What's the sort of outlook there?

Okay. Thanks, Dan. In terms of performance for the track record of fixed income, I think 72% is actually a level to be very happy with, without coming off very high level where the full year was 94%. I think the real testimony to the performance that you're seeing is firstly the delivery of the performance fees that came through in the first half. The majority of institutional funds came through via the fixed income area of our business, which demonstrates how we're delivering for clients in that space, and the fact that we continue to be receiving new consultant buy ratings and new business in that area. So I'm actually very comfortable with vision.

Markets have been, in the fixed income markets as well as [investing] markets have been volatile and difficult. But there are periods of movement that if we don't always get it right, but I'm not concerned either with any underlying trend or anything there. And actually I'm quite comfortable where we're positioned.

In terms of those in the second quarter, particularly Horizon. You were right, it was a little bit more volatile, not surprisingly given our biggest-selling fund in Horizon in our Pan-European Equity Fund. And with the concerns over the Eurozone, it was a very difficult period for just European equities in general and clients looking to remove money and take money off the table.

It's also fair to say that this time last year, when markets had bottomed and started to recover, it was actually European investors were one of the first to actually put money in. So when you started to see a wobble of markets and concern over the Eurozone, a lot of European investors were sitting on probably some of the best gains of the client base, particularly in retail space. And so it was unsurprising that some of them were taking some money off the table, given that they had actually come in quite well in the second quarter last year.

Horizon continues to perform well into July and into August. And the trends that you've seen so far in the first half remain intact, and certainly in that sense with that business.

Any other questions from the floor? Otherwise we'll --?

Thanks. I'll do just a quick one. In terms of product pipeline, can you share anymore color on -- you mentioned emerging markets and so forth. Are you doing anything in absolute return? Are there any specific areas where you think demand is really picking up quite materially and that's something you need to be more active in?

In terms of our product pipeline, there's a number of new initiatives we'll be looking to implement, and quite a few over the coming six months. There's a number of interesting products we're talking to clients about in property. So we'd like to be in a position to raise additional funds for some new areas in property, leveraging off our existing strength, particularly in retail. So that's an area that we're focused on.

You were right around absolute return, and taking the hedge fund portfolio that we have and moving them onto regulated [USIPPs] products continues to be a theme. We have recently launched the currency fund, which was previously the hedge fund into the USIPP space. That actually launched on July 1, and gaining good traction and good commentary from terms applied. And we'll continue to look at taking up product from there. So that will continue to be a focus for us. And we do see investor appetite for those particular products in that particular area. I think having the branding of someone who's been in the space is generally quite helpful when going into the marketplace in that area as well with new products.

Any other questions from the floor? I might hand over to the operator to take any questions from those on the line.

(Operator Instructions). The first question comes from the line of Arjan van Veen from Credit Suisse. Please go ahead.

Thank you. Andrew, I've just got a couple of questions, if I may, on your search for increasing the size of the Company or looking at acquisitions. The first one's around the gearing ratios you've got on slide 16. Is there any of those we should be focusing on in terms of where you might see the maximum limits in terms of where those ratios can go to?

And the second part of the question, you've obviously given -- you're looking at the US. You're looking at Asia, should potential opportunities arise there, although there are not many around. So the question really is whether, if something more domestically based turns up with the right metrics, particularly given your success in integrating New Star, is that something you would consider as well?

Why don't I take the second question first and I'll hand to Shirley to talk on the gearing ratio? Look, Arjan I think the strength of the business is such that the organic profile of the business and the ability to grow the business as it currently stands is quite strong and we're quite happy with that state.

That said, I think it is an interesting time for the asset management industry, and particularly for independent asset managers, where that is becoming more and more the dominant form of ownership structure for asset managers. And our approach to running investment teams, our strong distribution across the globe, is clearly an attraction to individuals or businesses that are looking to change the ownership structure. And there's a number of opportunities that constantly come available. And we assess them against a pretty strict criteria, firstly looking at what do they do for us in terms of expanding either our own investment capabilities or broadening our distribution reach.

Our focus has been on higher-margin areas. And the RidgeWorth position we looked at was clearly adding new capabilities. Particularly domestic equity and domestic fixed in the US marketplace, which would have complemented our US mutual fund range.

If we were to look at domestic UK, I wouldn't say never. It's not necessarily the priority particularly from a distribution point of view as we're very comfortable with the distribution we now have, particularly given the New Star acquisition and our already strong institutional presence in the UK marketplace. So I don't see any gaps from a distribution point of view supporting us in the UK. If, however, our domestic players that were available brought new investment capabilities or continued to expand what we were doing in other geographies, then that may be of interest, but we'd look at it at that point.

I hope that answered that part of the question. And I'll hand over to Shirley to talk about if we were to do anything over and above organic growth, the impact that that would have on the balance sheet.

Yes. Thank you. In terms of an acquisition, how we would fund it would depend on what the acquisition was itself, what sort of scale it was relative to our current size, the nature of the acquisition. And in terms of ratios, the two that I probably focus on most are the gross debt to EBITDA and the interest cover. And both of these are well within the acceptable norms in our industry.

We were obviously happy at December and happy that we could go higher on the gross debt to EBITDA from that point, although the interest cover could reduce from there. And we've moved further away from those in terms of lower on the gross debt to EBITDA and higher on the interest cover since then.

Thank you for that.

The next question comes from the line of Nigel Pittaway from Citi. Please go ahead.

Hi, Andrew and Shirley. I was just after a bit of commentary, a bit more commentary on the momentum within the higher-margin flow category. Obviously GBP0.7b first quarter, GBP0.3b second quarter. I take what you say about obviously a bit of property pipeline going in post June 30, and also that you're net positive in UK retail. But can you give us a bit more flavor as to whether or not we should regard the second quarter as a bit of a blip or whether or not, given market conditions, that's more the ongoing trend?

Yes. Okay, Nigel. Yes, I'm happy to try and give you a little bit of color for that. I think we touched on earlier the Horizon fund, so hopefully that gives you color there. UK Wholesale continues to do very well. We're pleased with how it's going. However, I would just highlight the International Property Fund, transfer is GBP180m that will flow -- it's left up to Aviva on August 2, so you'll have that. Putting that aside, then the trends are quite positive in that space.

In terms of US Wholesale, that is an area where, as I mentioned, actually all equity categories are in net redemptions in the US. We're holding our own, probably gaining market share, given what's happening in the industry. But we haven't seen a reversal so far this quarter for that position. So, again, it's very difficult to see us move ahead in that space. And I would expect it to be much more around what you saw in the second quarter. And really to see a recovery, you probably need to see just people getting more bullish on equity markets in general, and probably a weakening of the US dollar to support international flows there. So I'd be more cautious on the US than probably what you saw in the first quarter.

In terms of hedge funds, there continue to be a number of initiatives and pipelines that we're looking at. So I expect to continue to see business won in that space.

And then on property, the second quarter was just difficult, partly because some of the [sites and] property. We actually sold some properties on behalf of our clients to rebalance. So even though we were putting money to work in the pipeline, we were also selling into areas where we thought the market had probably got a little too hot, and rebalancing the portfolios of behalf of our clients.

I'd expect that we should be returning to similar levels of investments that you saw in the first quarter for the remaining two quarters of this year. If we could accelerate investments depending if markets come off or more properties come on the market, we will. But I would expect that we'll be looking at more like the first-quarter flows in that sense.

I hope that gives you a bit of a color. I'm not going to give you an exact number, because it's hard enough for me to predict the flows here in any more detail than that. But it probably gives you a bit of a flavor of where we were in the first quarter versus second quarter to how I see it going for the rest of the year.

Okay. Thanks for that. Maybe just one further question on the hedge funds. Clearly you're saying that you still expect that pipeline to be okay. So are you basically saying that the drop-offs in performance there is, in absolute terms, looks a little bit disappointing but, in relative terms, is still not going to be a prohibitor to attracting flows? Is that a correct interpretation?

I think in terms of hedge funds, the -- I think when you saw the -- the one new number, which shows a 41% in the first half, that -- anything that doesn't get an absolute return becomes a zero on that score. And the average fund in the first six months of this year is down 1%, actually just less than 1%. So it doesn't -- you don't need many funds to just tip over a negative return to impact that number.

But the absolute performance is actually encouraging and we're happy with. We continue to see strong interest in -- I talked earlier about the -- that it is taking a longer time for people to invest. But we are having those enquiries and discussions. So we're fairly happy that we'll see flows continue in that space, notwithstanding the difficult market that its in.

Okay. Great. Thank you very much.

The next question comes from the line of Andrew Hills from Wilson HTM. Please go ahead.

Andrew, just a little bit more on the performance fee outlook. A lot of the GBP24.3m of performance fees for the first half of 2010 were achieved from the fixed income institutional client mandates. Just on that category alone, do you expect the performance fees to continue into the second half?

We do expect to continue to earn performance fees in our fixed income business. A lot of our products, particularly in the fixed income space, are above the high-water mark, so they are in performance-fee-earning territory. That said, the investment -- the performance of fixed income market over the last 12 months has been very, very strong and above normal levels as you saw recovery in fixed income markets from the levels it got to at the end of '08 and early '09. And what you saw in the first half was, to some extent, carrying on from what you saw at the back end of last year, where there were some of the extraordinary returns coming through from fixed income, driving bigger numbers than you may expect.

So with fixed income business, I do expect to continue to contribute meaningfully to performance fees for us, but probably not at the same material level that they had in the second half of last year and the first half of this year, just because of the fact that I don't expect the returns in fixed income markets to be at the same level that they have been at that period.

Okay. And just one more from me. Can you remind me what's going on with the transition of ownership with the New Star institutional managers?

Yes, at the moment we still retain control of that business, which is why you can see it consolidated in our accounts. The business is set up in a way that gives the managers the ability to purchase that from us at pre-agreed levels over the coming years. It will take a number of years, and probably at least five years for them to acquire a majority stake in that business. And even when they have got to a level that we'd expect them to buy it out, we will retain an existing stake of probably 25% of the business. So we won't be removing our ownership totally.

In terms of how that's going, that's one of the reasons that we set it up as a separate line, because it is actually set up as a separate business within Henderson. They are a self-contained unit. They are in our offices here, but they are in their own ring-fenced offices for that for clients. And the reason for doing was very much that they're in the same category and space as our existing [EC] business and we would have disrupted both their business and our business too much if we put them together at the time of the merger.

So I think the performance and the outflows that they see will mean it will be a longer period probably that the earn-out that they acquire the business over will happen. But we both remain committed to achieving that as and when they are able and in a position to deliver on that.

Okay. Thank you.

(Operator Instructions). The next question comes from the line of Mark Hancock from Precept. Please go ahead.

Good evening. How are you? It's Mark Hancock from Precept in Sydney. Just in regard to fixed income. Andrew, could you just explain a little bit about the positioning and what drove that performance and where those funds sit now? Was that, for example, driven on duration strategy or credit spread strategy? And how are the managers actually positioning the fund at the moment? How are they -- what are they setting themselves up for? What sort of market would be conducive to keep these fixed income fees coming through in the second half and beyond, if you understand?

Yes. The main areas of where we've better turn of performance has been in the credit space, where we just -- we typically have been very successful in both UK and European credit portfolios in terms of acquiring new business. But also we've got some funds that we've put out over the last several years which have a more balanced approach in fixed income, allowing both duration strategies, currency strategies, emerging market debt and credit strategy in there. So all of those have actually been quite positive. So our rate positioning and our credit positioning has benefited the performance.

We continue to be relatively quality-biased in the portfolio. And I think, in that sense, markets have been fairly whippy over the last couple of months in that area. But we continue to believe that the high level of cash generated is supportive of credit spreads in general.

Obviously there's been nervousness in terms of government rates, as you've seen, with the Eurozone in particular. But we continue to sit there and favor the UK over the euro at the moment. But we have seen a significant [retracement] of the position that was on that earlier in the year anyway.

And would there be longer duration -- shorter duration than the benchmark or longer?

I think at the moment they're actually fairly neutral because I just think the conditions are such that the volatility is meaning that there's not really a lot of appetite to take much risk. So I think we continue to monitor the economic news flow before putting on any big positions. So I think on the duration side it's a pretty neutral position.

A separate question, if I could be allowed. On RidgeWorth, you -- why didn't you expense the transaction fees as a non-recurring item? Just because it was fairly small?

Two reasons. One, because it wasn't material to the overall result. But also because looking at inorganic growth is one of the things that we do and intend to do. So although we wouldn't be expecting to incur another GBP3m in the second half, looking at an aborted deal, it is part of our business.

Yes. Is there -- (inaudible) can you give us any more clues on why -- where the terms couldn't be agreed? Was it mainly price?

No. There were a number of terms that -- we had a pretty strict criteria of what we're looking at, which -- some were financial, but also a lot of cultural and other aspects in terms of how the business would fit. And given the nature of the transaction which included or incorporated our parent entity that has significant asset investment in the business as well, that there's a number of complexities that cover [outlying] bank-owned asset managers. And we just didn't -- as you can imagine, there's a myriad of different discussions we had to have and we weren't comfortable.

The spread in the strategic positioning and the quality of that business was very good and the performance was strong. They had a number of very, very good products that would have been fantastic to have in the stable for the strategic rationale for looking at it. It was and remains very strong.

Okay. Thanks very much.

The next question comes from the line of Philip Pepe from Deutsche Bank. Please go ahead.

Hi guys. Just a couple of quick questions on the costs. I might as well start with the RidgeWorth costs which you just touched on. I think you mentioned earlier that the operating margin would have been closer to 31% without those costs. But given your continuing search for acquisitions, how soon should we be expecting that level to track towards 31%, although you know that you won't expect GBP3m in the second half. Is it realistic to assume zero going forward?

And then secondly, in terms of the compensation ratio is 44.5 or thereabouts, what we're expecting for the foreseeable future for that margin?

Yes. Well I think probably if I start with the compensation ratio first. As markets improve and our revenue increases, we'd expect to be paying more out in variable staff costs. But that doesn't mean that the compensation ratio needs to improve to achieve that.

In terms of the fixed staff costs, we expect them to be relatively stable. But we will always look for opportunities to invest where we see that there's growth, as we've done in the UK retail business.

In terms of all the other costs, part of the reasons I did a comparison between second half of '09 and first half '10 was to show you that we had already started investing in the second half of '09 in the UK retail team. So the GBP4m difference between first half '09 and first half '10 is not an ongoing difference between the two halves this year.

So the other costs, I expect them to be relatively stable. I don't expect us to incur another GBP3m on aborted deal costs.

Okay. Thank you.

There are no further questions registered so far. I hand the conference back to you, Andrew.

Thank you. I will just check if there's any further questions from the floor. Okay.

Well, thank you for your time today. If there are any further questions, obviously please feel free to contact Mav Wynn or the Investor Relations staff and we'll hope to answer them as promptly as possible. Thank you.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect your lines. Thank you.