Janus Henderson Group PLC (JHG) 2016 Q2 法說會逐字稿

Welcome everyone to Henderson's Interim Results. Welcome to those here in London and I understand there's quite a few on the line joining us both in London and also remotely from Australia. In terms of today's presentation, we cover three time horizons. After I've given you a brief overview of the half year result I'll start by focusing on the immediate aftermath of the UK's vote to leave the European Union to give you a sense of how we've responded as a business to that result.

Roger will then take you through the half year results in much more detail. Then I'll come back at the end with a longer term perspective to talk about how our strategy is doing as we're half way through our five-year plan and how that's prepared us well for the current markets and also how we see the future developing from here.

On here you can see the key highlights of the results. What was clear is widespread uncertainty in markets has really been the dominant theme over the first half. Here in the UK, the aftermath of the EU referendum has monopolized the news agenda, and the uncertain outlook this poses for both Britain and Europe, has caused clients not just in the UK and Europe but also further afield particularly in the US to pull back from investing particularly into European assets.

Our investment performance held up well with 77% of assets outperforming over three years despite a highly volatile market backdrop and also significant reversals in the key trends that drove 2015 financial returns.

Looking at net flows for the first half it was negative in retail and institutional giving a total outflow over the period of GBP2 billion. The majority of the retail outflow came in the immediate aftermath of the referendum result, whereas institutional flows were positive in the second quarter after the outflows in Q1 which we've already reported.

Total assets under management continue to grow with the big positive in the last six months being currency translation effect, a benefit from our increasingly global business mix as Sterling declined after the EU referendum.

Underlying profits and earnings were down mostly because of a reduction in performance fees. The Board however has raised the interim dividend do to GBP0.032 per share.

I want to start now by looking at the impacts on the referendum result. In its immediate aftermath we focused on four key areas. Firstly, clear and open communication with our clients. Secondly, monitoring investment performance and also the operational metrics on managing our client portfolios, then taking action where necessary to ensure the fair treatment of all of our clients. Finally, engaging with regulators, industry peers and policy makers on what impact it may have on the industry going forward.

The political situation in the UK is becoming clearer sooner than expected with Theresa May taking over as the new Prime Minister on 13 July compared to the original timetable that stretched out to early September.

To begin the formal process of leaving the EU the UK must trigger Article 50 of the Lisbon Treaty. Mrs May has stated that the UK need to have a clear negotiating position in place before she triggers Article 50 and that she expects to do so by the beginning of 2017, marking the start of a two-year negotiation period. There is a very long way to go but a reassuring sense of purpose is starting to develop.

Against this backdrop we focused on proactive engagement with our clients to keep them up to date with our read on the situation and the actions that we've taken. We kicked off with a prearranged contingency plan on the Friday morning after the vote, and had fund managers on camera and communicating with clients from the start.

Client feedback focused on the timeliness and quality of the materials we distributed and the 50,000 page views that we saw on our Brexit commentary were eight times higher than any regular piece of monthly commentary we would normally put out. In tough market conditions it is more important than ever to honour our brand promise of knowledge shared.

While we know there is little discernible impact on client flows at the time, history has shown us that prompt relevant communication in times of crisis can build brand appreciation and loyalty and have a significant influence on longer term growth prospects.

The chart behind me, which I know is a busy chart but is in your pack, shows our top 20 retail funds for Assets Under Management and their relative or absolute performance in firstly the 11 months to the end of May, then the 12 months to the end of June, and finally looking at how it has performed in the three weeks since that.

What this shows is that despite market volatility the referendum had a relatively modest impact on the performance of our largest funds. Going into the vote, most of our managers took the view that a Remain outcome was priced in so they made sure they were positioned cautiously to limit downside risk.

In some cases, investment performance has improved since the referendum. Looking at the top fund in the list, Henderson Gartmore Continental European Fund, the uncertainty fostered by the Brexit result aligned the market better with John Bennett's cautious stance which meant that his fund, which had large weightings in healthcare and a recent billed exposure to oil majors, did well.

Looking more broadly at investment performance for the half, you can see up here that our overall three-year outperformance is still at 77%, the same as it was when we updated you in the first quarter. So we still have an exceptional long-term track record to talk to clients about.

Since the first quarter the one-year number has improved modestly by a couple of percentage points from 52% overall to 55%. If we look at the weaker numbers in the one-year column, European equities had a tough first half as many of last year's trends reversed with outperformance coming in materials, cyclicals and energy. As you've just seen, some of our major European equity funds have since seen performance improve since the referendum result at the end of the period.

If we look at multi-asset performance, it's difficult to evaluate from these charts. The apparent deterioration you see here is in fact a small percentage change in a couple of our larger funds. As you can see the three year numbers remain strong. In alternatives, the major cause of the change in one-year performance is a Henderson UK Property Fund. If we were to exclude the property fund from this view, 68% of our alternative assets under management would be outperforming on a one-year basis, and 100% on a three-year view.

I thought you'd appreciate a few minutes of insight on decisions we've taken in regard to the Henderson UK property fund. On the left of the chart what I've shown is the shape of our daily inflows and outflows through June until we suspended trading in early July.

As you can see the fund was seeing modest net outflows in the run up to the vote. The first point to note is we acted promptly and decisively and we were the first fund to move to a fair value pricing on 24 June in the immediate aftermath of the vote. The second big spike down was in redemptions, and came after the first of our peers announced that they were suspending trading in their fund on 4 July.

Our decision to suspend came at the point where the redemption run rate reached an unsustainable level, and was taken when it became necessary to make sure that the clients who chose to stay in the fund were not disadvantaged. The suspension of trading creates time for an orderly sale of certain assets to re-establish liquidity. There is a keen focus on maintaining the balanced nature of the fund in terms of properties and tenants and also protecting the attractive income the fund continues to deliver.

As an orderly market appears to be establishing itself the fund team is seeing healthy interest in the properties it is looking to market. In particular, in relation to London and south east properties, interest is accentuated by the sharp decline in the value of Sterling.

We are acutely aware of the frustration a dealing suspension causes but we are pleased that even in these very difficult circumstances our clients commended us for our openness and timely communication. Top of mind for our clients is striking the right balance between price and liquidity, and the prevailing tone of their feedback is that they understand and respect our decision to suspend.

Next, I want to look more broadly at the operational considerations for our business in light of the Brexit vote.

The message coming through from this chart here is a very clear one of minimal change. We have two product ranges which could theoretically be effected. Our UK OEIC product range is currently passportable into Europe, but in practice it is sold primarily to UK clients, so there's no change expected there.

Our SICAV range is our most actively sold on the continent, with 75% of its clients located in Continental Europe. SICAV's are run by our Luxemburg management company, sub-advised to a predominately London-based fund managers'. It is possible that the Luxemburg authorities will require more in country oversight once London-based management sits outside the EU. But this will lead to the addition, at most, of probably a handful of people, quite immaterial in financial terms to the Group.

We're turning to regulation, our current assumption and what we have been told by the FCA is that we will need to continue with the implementation of European Regulation notably MiFID II in order to continue to access the Single Market. In the UK I personally am actively involved with policy makers and at Treasury and elsewhere in Government, with the FCA as well both, at a firm and an industry level, as are many other members here of our management team.

There is potential for regulatory divergence between the UK and Europe as part of a Brexit discussion, but, particularly given recent changes at the top of the Treasury and the FCA, it is far too early to speculate on what direction UK regulation might take.

Now turning lastly to flows we took at the effective flows on previous market shocks to see if there's any lessons we could draw. On the chart you can see the cumulative effect on our retail flows of first, the demise of Lehman Brothers, which signalled the start of the financial crisis, and key moments of risk to the Euro from Portugal, then Greece and finally Mario Draghi's Pledge in July 2012.

I would say the current conditions feel entirely different to actually both these scenarios. While Sterling has fallen sharply, markets have been stable and even rallied. When considering this chart, the big difference for Henderson today is that we're in a fundamentally stronger position than we were in either of these previous points. Our investment performance, our brand recognition and our client interactions are significantly better than at the other two points highlighted here.

You can see the progress we've made when you compare our cumulative flows with the second line on the chart which represents the industry. We've clearly grown much faster over that period. It should be remembered that the outflows we have seen in the run up to the UK referendum has set us back to where we were in the third quarter of last year. It's clearly impossible to predict how the shape of the curve will develop this time around, but strong investment performance and well developed client relationships should offer us protection.

This chart shows you the retail outflow pattern through June to the end of last week. This shows accumulative GBP1.9 billion in the period shown on this slide, and this compares to GBP1.4 billion in the period we have shown in our results today. As you can see, outflows are moderating as we move through July.

In summary, in post-referendum markets investors are going to have to come to terms with a protracted period of political and market uncertainty. Interest rates will be lower for longer which will hold back overall returns to other asset classes.

Whilst I was personally disappointed by the result of the referendum, I've been very pleased with the way that Henderson has responded. Our contingency planning and risk management processes worked very smoothly, and everyone in the firm kept the interests of our clients front of mind through what was a very difficult period for them.

Once Roger has taken you through the results, I'll come back and talk about how I think our strategic positioning has helped us in both recent weeks and months and how it might move looking forward. For now, Roger?

Thanks Andrew. As Andrew said the first half was dominated by the political and market uncertainty both before and after the UK referendum. These conditions resulted in a decline in our income, mostly driven by a reduction in performance fees.

Expenses also declined in the period and I'll talk in more detail later about how we're actively managing our cost base. The result is lower profits than last year, but it's worth bearing in mind this is only the third time in our history that we've generated underlying profits in half a year of over GBP100 million, evidence of how our business has strengthened.

I'll start talking about flows and first retail flows. This slide shows you the quarterly trend, not surprising June outflows represented almost 90% of the first half total. Now looking in detail at each of our product ranges. The US mutual, in orange, were virtually flat for the half, positive through May, but negative after the UK referendum in June.

The biggest outflow in US mutuals was from the European Focus Fund, as US investors pulled back across the board from European exposure. Looking more broadly across the US range, we continue to see inflows into an increasingly diverse range of styles, global equity income and strategic equity income.

In the SICAV range, in yellow, the biggest outflows were in European focus funds. These were balanced by positive flows into Henderson Gartmore UK Absolute Return, and Nick Sheridan's Henderson Horizon Euroland, which has seen excellent performance and provides a good option for clients seeking to invest in European equities, but avoiding UK exposure.

Clients in France, Germany and Switzerland, have adopted a more domestic focus, whereas clients in Italy and Spain have remained more outward looking. That said there's no sense of a bias strike against UK managers and no sense of continuing large scale redemptions.

In the UK, in blue, the majority of our Q2 outflow came from the Henderson UK Property Fund, and the closing of the Optimum Fund range. Beyond these two effects, flows were relatively muted, with demands strongest for the UK Absolute Return and fixed income strategies.

Our focus in the UK at the moment is on good communication with our clients in our property and European focus funds, and on promoting reliable sources of income and absolute return, as well as emerging markets. Overall, whilst I'd summarise the flow picture as clearly negative for the second quarter, there are elements of diversification which have helped us recover. The US Mutuals product range is broadening, there is geographic diversity within our SUCAVs, and in the UK, our business is well established and balanced.

Looking at institutional. The story here is of an increasingly global business, so on a slide I've added some detail to show how our net flows have segmented by geography. In blue, the UK and Europe is our largest and most established region institutionally, and therefore shows the greatest variation quarter-on-quarter. There's always an element of running hard to stand still in this business because of the closed end fixed income mandates maturing.

So far this year you can see the effect of the specific mandate losses we told you about in Q1, but there have also been some good wins in various fixed income strategies by UK clients. We've also gone onto developing pipeline in Continental Europe, across both equities and fixed income.

In Australia, in yellow, from Q415 you can see the start of the effect of our acquisitions balancing the global equity enhanced index mandate we've been running for a while. In the first half an existing client added substantially to their fixed interest mandate, and our newest Australian equity mandate also continued to add.

The pipeline is looking good both domestically and for some of our offshore capabilities, including global emerging market equity.

In the US, the picture remains mixed. In Q315 you can see the effect of the first trust closed end mandate. But Q116 by contrast was dominated by outflows from a global equities mandate. Encouragingly, Henderson Geneva helped take US institutional flows positive for the second quarter, with two mandate wins in small cap.

Whilst the lumpiness of our institutional business will always make it difficult to identify a clear trend, I'm encouraged by the increasingly diverse sources of flow by client, geography and strategy. You'll have seen from the St James's Place announcement yesterday, that they are proposing to add Glen Finegan's GEM funds to their platform, a timely piece of evidence to our developing institutional pipeline for emerging markets. The more our institutional client base builds and diversifies, the more resilient our business will be.

Now moving on to look at management fees. On this slide I've given you a bit more information than we normally do, to help explain what's driven the movement in our management fees between the first half of FY15 and the first half of FY16. As you'd expect the biggest driver is the strong flows that we saw in the latter part of last year followed by the growth from our Australian acquisitions.

Markets were negative, but were more than offset by FX translation effects; if Sterling stays at its current level, the effect will be even larger in the second half. For your information, nearly 60% of our revenues are driven by Non-Sterling currencies, whilst only around 30% of our costs are Non-Sterling.

The negatives are GBP5.6 million of one-off adjustments to our fees and rebates, which were booked in the first half of FY16 but related to prior years. A reclassification for some US mutual fund fees from management fees to other income, and GBP3.2 million of general margin reduction.

We've always talked about there being one to two basis points of margin pressure a year on our retail business, and this has been masked in previous periods by positive [MIC] shifts.

Moving on to look specifically at management fee margins. Back in February, I told you that our 2015 exit margin was 55 basis points, lower than the 2015 actual as a result of our Australian acquisitions. You can see that our actual revenue margin in the first half is lower than this, at 52.9 basis points.

Adjusting for the one off reductions to management fees I showed you on the previous slide, takes us back to an exit margin of 54 basis points. The one basis point fall from the full year exit margin to the half year exit margin is due to the retail outflows and the ongoing margin pressure that I showed you on the previous slide. Moving on to look at performance fees you can see from the charts that we earned considerably lower performance fees from SICAVs in grey, and from our offshore absolute return fund range in red, compared to the first half of last year. Twenty-nine funds generated a performance fee in the period, about half of those possible i.e. those with first half crystallisation dates.

So we continue to see good diversification in sources of performance fee. The difference in fees in the absolute return category is mainly linked to the closure of our Japanese absolute return funds, which we referenced in our first quarter announcement.

In the SICAV range the main difference between this year and the first half of 2015, is that there were no performance fees paid on a couple of our big, European equity long only funds.

You'll remember, however, that in our SICAV range, if we outperform on a relative basis but don't reach an absolute high water mark, performance fees are held over. If performance is maintained these fees are paid the following year, if that high water mark is reached.

The slide shows you when this last happened in 2012, when GBP6.3 million of performance fees were held back in this way and paid as part of the record performance fees we earned in the first half of 2013. The equivalent number in the first half of 2016 is similar. There's obviously no guarantee that these will get paid next year.

And next, costs. On this slide I've shown you the trends across our cost base over the last 18 months. The key to this is headcount. As we've invested in our business in 2015, we added almost 100 heads in investment management, distribution, IT and operations and assurance functions. Thirty-five of these were directly linked to our Australian acquisitions, and the build-out of that business.

Each new head was signed off by me, and the particular member responsible, so I'm confident that we added people in a disciplined manner to support our growth and our regulatory agenda.

So far, in 2016 we've held headcount flat. This is consistent with what we've been saying for a while that our focus has shifted from new investments to supporting the investments that we already have in place.

If you look at the fixed cost waterfall at the bottom of the chart you can see that the growth we've seen this year is driven by those 2015 headcount increases. Despite a 3% per annum annual salary increase, which took effect in April, business as usual cost increases are flat. And you'll note we also have a GBP1.1 million adverse variance from currency.

In the current environment, we are focused on controlling our costs, but at the same time protecting our investments, so that we can reap the benefits from them over time. We've also taken action on our non-staff costs, which are down 5% so far this year compared to the second half of last year. Overall, we are tracking in-line with my February guidance of high-single digit growth in fixed costs in 2016, despite the adverse currency moves, slightly higher on staff costs and slightly lower on non-staff costs.

Variable compensation was GBP17.4 million lower in the second half -- than in the second half of last year. In the interests of fair disclosure, I should point out that around GBP5 million of this difference is connected with the fall of our share price. However, there is also GBP6 million more in ongoing deferral costs for the same period last year. When you bear all of this mind, I hope that you'll come to the conclusion that variable really does mean variable at Henderson.

And here are our key ratios. As you know, our primary strategic goal is to grow and globalise our business and as we do, so to increase our absolute profit levels. In terms of our key ratios, we've always said that these should improve as we grow and globalise our business, as long as markets remain supportive. Whist we still have ambitions to improve our margins, maintaining our operating margin in the current condition is a good outcome.

And here's the remainder of our income statements. Our tax rate rose, as guided, to around 20%, in fact slightly higher, due to deferred tax reversals given the fall in our share price. The result of lower profits and a higher tax rate, partially offset by a lower share count, is an underlying diluted EPS of GPB0.071 per share. The Board has set an interim dividend of GPB0.032.

You should see this as evidence of Henderson's progressive dividend policy, which has seen us grow ordinary dividends broadly in line with earnings over the medium-term, but also as a step nearer to a one-third, two-third payout between the first and the second half's.

And I'll conclude with a few words on cash and capital. We repaid our GBP150 million senior notes from cash resources in March, meaning we are now debt-free. As previously explained, our cash resources seasonally dip in the first half, due to payment of dividends and bonuses, before building in the second half.

Our capital above our Group requirements has risen from year-end to GBP105 million. The interim dividend and our previously announced GBP25 million buyback, which we'll complete in the second half, are already deducted from that number. As previously discussed, the FCA is due to review our capital position in the second half, following the expiry of our capital waiver in April 2016.

And with that, I'll hand you back to Andrew.

Thanks Roger. Our presentation up to now has been deliberately short-term centred around the referendum, given the importance of those events over the last few weeks. But what I'd like to do now is spend a few minutes taking a longer-term view, given that we are at the mid-point of the five-year plan that we set out in 2014.

So at the mid-point in our plan, we are exactly where we said we would be, despite many telling us at the start that they thought we were being ambitious. Our net new money growth in the period, the two and half year period shown here, is 7% compared to a target we'd set ourselves back them of 6% to 8% and also with the industry having only grown 3% over that period. So notwithstanding what was a difficult first half, we have achieved an organic growth target that is more than double that of the industry for a period now.

We have seen market and FX growth of 7%. And this was compared to an assumption of around 4% to 6%. And we've also generated 3% of growth through acquisitions. We've executed well on our strategy, and delivered strong investment performance for our clients, as well as broadening our global client base and strengthened our financial position. Our business is stronger and more diversified with significantly improved opportunities for future growth.

If we look first at the performance of the new investment teams that we've added over the last few years, here's a slide that I showed you at the full year and we've updated it for performance until the end of June. What you can see straightaway is that the sea of green is pretty much intact.

There's also a couple of significant changes. So, for example, there is now one new track record for Glen Finegan's global emerging market fund. We've seen a strong improvement by Andrew Gillan and the Asian growth team. And we now have a strong three-year track record, which Kevin Loome, and the US high-yield team have achieved.

I'll just focus for a minute on global emerging market equities. Our distribution teams worldwide are doing an excellent job in promoting this fund, and Glen himself would tell you that he's been pleasantly surprised at the speed at which interest has built.

One of the aspects of Henderson's approach to help build interest with larger clients is that the fund is available in many formats. We have a US mutual fund, a SICAV, an OEIC, and shortly, an Australian unit trust, as well as providing separate accounts for our institutional clients.

The global pipeline is building very nicely. And as you would have seen from the St James' Place announcement yesterday that Roger referenced, this is already starting to get traction with some very key clients.

Diversification is key to sustainable, profitable growth at Henderson, and all of the teams on this slide are doing everything we've asked of them to diversify our investment management capabilities. We also continue to make good progress on diversifying our global client base.

The last two and half years has seen a considerable shift in the geographical diversity of our assets. The UK has come down from around 70%, to 50% of our business, in just over two years. And we expect this trend to continue given the investments we have made abroad. I should highlight that the UK remains a strong core market for us with a well-balanced retail business and good opportunities institutionally.

Continental Europe and Latin America has seen strong organic growth, which has led to a broader client base. In North America we saw the benefits of diversification in the second quarter with positive net flows in institutional, just as retail flows turned negative.

Historically in our US business, we've raised assets, which flowed principally into European and international equities. Strong performance in Henderson Geneva's US quality growth equity style, and also the US high yield performance, give us an opportunity to start to redress this balance.

In Australia, the Perennial acquisitions continue to bed in well, flow momentum has remained good throughout the integration period, led by the tactical income fund, which has now passed the AUD2 billion mark. We've started to see opportunities to broaden the platform relationships, which came to us with the acquisitions with interest notably in our global emerging markets capability developing well down there.

So if we look ahead, it remains hard to predict when market uncertainty will start to dispel and our sense is that investors will remain on the sideline until visibility improves. That said, retail net outflows are starting to moderate and we are very pleased with the shape of our institutional pipeline which is the strongest it has been for a number of years.

If we are looking more broadly, we are a fundamentally stronger business than we were when we set our strategy two and half years ago. As you've seen throughout this presentation, we've successfully grown our investment management capabilities, our client base and our brand and there are some great new teams within the business ready to realise their potential.

Our plan is to stay close to our clients, stay vigilant on costs and stay true to our strategy. We are staying the course. As markets stabilise, which they inevitably will, we'll see the strength of the business and our promising recent investments come to the fore and drive future sustainable growth.

With that, I'd like to pause and take questions. We'll start with questions from the floor and then go to those on the line.

Hi, good morning. It's Hubert Lam from Bank of America, Merrill Lynch. Three questions if I may, firstly on non-comp cost growth. I think Roger mentioned that you still expect high-single digit percentage growth this year. But I'm just wondering into next year should we expect that to moderate.

Second question on flows, you're seeing from July flows in retail start to moderate. Is that mainly because of gross outflows slowing or you're actually seeing some people stepping in right now in terms of gross inflows?

And third question also on flows. In terms of the institutional pipeline you're saying that's quite strong, any indication how big that is? And are you actually seeing institutional taking a bit longer -- you expect institution to take a little bit longer to fund now given the uncertainty.

Thanks Hubert. I'll take the second and third questions, I'll do that now and I'll get Roger to update you on your non-comp cost question there. In terms of the flows, the moderation in flows, well I think you saw in the immediate aftermath of the referendum result was, redemptions picked up.

And so what we'd spoken about prior to that in the first quarter results was that you've seen really a slowing of gross sales, but actually not a pickup in redemptions through the first quarter. The referendum itself caused people to just pause in their investments and actually, I'd say build up a reasonable amount of cash.

On the result itself, and in the very immediate aftermath, you saw -- did see redemptions pick up. And what we are seeing now is those redemptions starting to slow down. So I think the immediate effect was just a flight to cash, flight to quality. That's moderating.

You've yet to see growth sales start to pick back up. But I think one of the things you asked me is, because things are starting to be more stable and the political situation is starting to get to a position quicker than people thought, I suspect that you will -- this doesn't feel at all like we did in say 2008 or even 2012. Because you're not having the large market gyrations over the last two or three weeks. Sterling has sort of stabilised at a level, markets have actually been flat to trending upwards. So I think people wouldn't have guessed that.

Obviously we are hitting the quiet period now with July and August, so if markets stay around here I suspect that as we come out of the holiday periods over here that will be the -- people will then start to look at where they are.

And I would say generally people were quite high cashed up going into this, and therefore remain quite cashed up. So if they get confidence that markets aren't going to be that volatile there's a lot of money to come back to work. It's not -- there's not a lot of leverage in the system, not compared to where we might have been in previous downturns, so hopefully that gives you some context on the short-term what we are seeing in flows.

On the institutional side, look I don't want to put a number to it. I think in my comments I said it's the healthiest we've seen for a long time. It's quite broad-based. It's across a number of asset classes and also our investment capabilities. And, regionally, Australia and the US are picking up following the acquisitions we've done down there as well as seeing strong growth and, Roger referenced this in James' Place one yesterday, in emerging markets as examples of continued strength in this market as well.

In -- like anything, institutional flows, until they're really in the door you're always going to be cautious on those. What I would say is, as a trend, institutional accounts haven't seen really a shift based on the EU referendum result. Though I think we are seeing a greater interest in non-European growth, whether it's emerging markets or some of our capabilities in the domestic markets of Australia and the US (inaudible). And that's a combination of our performance, our capabilities, and, I think, clients looking to do asset-allocation decisions.

And Hubert, on non-staff cost, think about what drives that. Headcount is a driver of it, so as we're holding headcount flat, then that won't -- that then won't increase. The size of the business is another driver of it. That's got out investment admin costs are in there. So, the size of the business, the number of transactions, et cetera, drives that. So, again, the success of the business will influence that.

And the other bit is opportunity. So, if we see more opportunity, we'll turn the tap back on in areas such as marketing where we've trimmed back. And the last thing I'd say is you've got to think about FX in there. Technology costs tend to be driven by dollars. Market data costs are getting more expensive. So, there is -- I'd say that's where the inflation is, is probably in technology.

Right.

Good morning. It's Hon Esheblar from Exane. Three questions, please.

First, could you maybe expand a bit more on retail flows coming out of the US? Historically, over the past few years, you've benefited from a lot of appetite for European equities on the active-management side coming out of the US. But that clearly seems to have turned. I'm wondering how quickly you think appetite for European equities can come back in the US.

Secondly, on margins, your retail margins seem to have dropped from 73.6% to 72%. I'm wondering if that's a mix shift or if there is any margin pressure whatsoever in equities, I mean, in given product categories.

And, finally, could you give us maybe a bit more flavour as to how things are going where you've reached your three-year track records in high yield and your other new fund launches?

Yes, in terms of the US, you're right. We've seen considerable success over the last couple of years, not just in our international products, global-equity income and international opportunities, but in particular our European Focus Fund.

I think the -- what you'll see in the US is some reduction in exposure to the US and European equities and you will have seen that through the statistics that the US put out. And given we were so strong in the category we're not immune to, obviously, outflows in that regard.

I'd say our international opportunities and global-equity income in particular are holding up very well. So, the global and international ones, okay, it's really concentrated around the European exposure. It actually hasn't been as bad as you might expect coming out of there. Though what I would say, is it was a core-asset allocation decision by many of the major wire houses and broker/dealer networks to move to an overweight positional in Europe. And I don't think at the moment they've made their decisions on where they want to be longer term.

So, I think you still -- the good thing about the quality of the client base we have there is they are very long term in what they're thinking. They're not just the short-term movement in portfolios. But they will be assessing the situation in Europe and taking a view of how that does relative to the [domesticate] markets and the like.

There's clearly uncertainty in the US around the upcoming election in the domestic element, and that will remain. And certainly nothing that's happening over there allays that fear. But I would say that you could see the exposure to Europe remain at reduced levels and could even be at risk of coming down further at this point.

I think it'd be a while, if they were to reduce their exposure to Europe, for it to come back, though I would say we're also -- we're moderating that by our, obviously, international opportunities on global-equity income but, increasingly, also the domestic capabilities.

You mentioned the three-year track records, US high yield, for example. High yield's not something that's necessarily in favour at the moment, as well, but our track record bodes us well when that does come in. And it's one of the things that we look constantly at, of supporting that business, because the numbers there are outstanding when you look across peer groups.

In terms of the margins I'll let Roger just update you on that.

Yes, retail-flow margins, as you -- sorry, retail margins, as you say, exit at 72 basis points as opposed to 73.5 last year. So, as I say, that's the -- we've always talked about a basis point or two of general margin pressure and, I think, particularly as we grow.

So, where we see that most is either US fund ranges giving TFE breaks and also just general larger clients. We're dealing with a lot of the major distributors. As they get bigger there is price pressure there, which I've put in the good category. So, general price pressure, and a little bit of mix on it.

And just touching on other -- you asked about the funds capabilities that have got three-year track records. Obviously, US high yield, great performance. The asset class itself is yet to gain real traction, but when that does come back we're really well placed. Interesting, agriculture has been an area that's been good growth for us; very strong numbers, you can see on the chart we gave there, over a consistent period. And that's been seeing steady inflows.

We spoke about the US small-cap capabilities. We had a couple of wins in the first half. We continue to see wins in that space, so that's doing very well. And on Australian equities, actually, they've got a very interesting Australian long/short fund that's just hit its three-year track record, great numbers there and we're starting to see some traction in that regard.

So, a number of these investments, as they hit three years and beyond, are starting to build. It'll be modest. It'll start to build slow, but as that momentum starts to add to it, so we're quite encouraged certainly by the performance and the opportunity that, therefore, gives us in much more regions.

Hi. Good morning. It's Girjit Kambo from JPMorgan Cazenove. Just on the regulatory environment, obviously we have the market study review, which was scheduled to come out August. It feels like that may get pushed back -- is there any thoughts on that, given what's going on in the UK?

Yes, it's probably too early to give anything on the FCA market study. We were one of the participants asked to submit a lot of data. We've had several conversations with the team looking at it. Certainly it doesn't appear to be anything that's coming out that there's like a smoking gun or anything found, but it is being very quiet what's coming out.

There are some people saying -- well, wouldn't it be best, given the work the FCA has, to put this on hold? I think they are quite well-advanced in the work they have done, so, I'm not sure if it will be delayed at all. Andrew Bailey's only recently joined at the beginning of this month, and I'm sure he'll be taking a keen look at it.

The timetable has been set for mid-September to release the initial findings or the first part of the consultation. I suspect that that will slip, though I've got no -- nothing to point to why that'll be the case. At this stage we're working on the assumption that the FCA market study will continue in its current form unless we're advised otherwise, and there's nothing we've seen yet to do that, though I'd say the FCA is quite swamped with post-Brexit work, and obviously with Andrew having only just recently joined I'm sure he's looking at his management team and putting in place a structure and approach that he'd like.

So, we haven't yet had an opportunity to have a lot of time with him on this particular point. So, I think it'll become clearer over the next couple of months, but for now you should work on the assumption it's going ahead.

Okay. And just one follow-up question on -- I may have missed this because I was a little late in terms of the commercial property suspensions. I think certain asset managers have gone that route. Some have gone down more of a pricing route. What are the considerations when you made that decision and is there any sort of -- do you have to discuss this with the regulator, making these decisions?

Yes, look, we kept the regulator fully informed throughout the period. And obviously we -- and the -- there is a slide in the pack that, if you go back, you'll see where we talked a bit about this. The redemptions spiked after the suspension of the first fund on 4 July and we suspended on 6 July.

Look, I think in terms of taking -- the interest that we took very clearly and as responsibility for the - for, mainly the portfolio, is looking at the interest of all clients in here. And it's certainly not in the interests of those leaving to make sure that the property, any sales that occur leave the portfolio unbalanced, in terms of its current mix and makeup.

And also for those leaving, given the liquidity constraints in the market place at the time, it's not in their best interests to give fire-sale prices. We are in the process of building up healthy liquidity levels in the portfolio.

We've been able to transact it -- properties around the level of the NAV in the portfolio at the time that the suspension occurred. So, we're not seeing a reduction in overall values. And that's probably driven by the fact that there's quite a lot of buyers coming in from -- non-UK buyers with the sharp fall in Sterling affecting that.

And we're making sure, as well, that the properties we are marketing keep retaining the balance across the portfolio in terms of the mix of types of portfolios, the tenancies, the income structure of the portfolio. And we're very pleased with how that's going.

I'd have to say an orderly market in property appears to have returned. There's certainly not panic selling or a lack of buyers out there, as well, and that's exactly what clients are looking for. The majority of clients wish to remain in property and are long-term investors in it and, therefore, they want their interest to be maintained through that and we're able to do that.

So, whilst it is difficult, it's not a decision you take lightly, I do think it's being done in the interests of clients. And the communication we've had with clients throughout the entire period has been well received by them. And we've had some very positive comments on the fact that they feel engaged and communicated with throughout that process.

In terms of regulator, they're fully aware of us, and fully supportive of what we're doing. Whether there's any changes from a regulatory point of view down the track; that is a possibility. But I would say that that's a medium to longer term -- there's nothing immediate going to change because it's -- the regulator wants to see us through this period.

And you have to say if you look at these funds they've performed incredibly well, even during this period. But for 99% of the time they've done exactly what clients have asked. And even in the period when liquidity has been constrained, getting the balance right between price and liquidity and balancing clients, I think it's a very good outcome overall. And I think the regulator reflects -- accepts that and is -- recognises that.

Thank you.

Is there any further comments from the floor here? If not, we'll go to the lines and see if there's any questions from those on the call.

Thank you, sir. Simon Fitzgerald, Evans and Partners.

Good morning, guys. So, I'll just ask these questions one at a time. But, firstly, just in regards to the transaction income or the net other operating income of GBP19 million, I just wanted to know if there's anything unusual in that this time around?

Is it --? Other -- no, is the answer to that. Last time around we had -- this time last year we had gains from the sale of property. The property is effectively seed capital in there. But this time around there's nothing major.

Sure. Thank you. Next question just on the variable employee compensation of GDP67 million. I just wanted to get a handle if there was any sort of payments from the last years' performance in that. I guess I'm just trying to understand whether that's a reflection of the first-half's performance or - et cetera.

Yes. No, that's -- that relates to this year. So, there's no carry forward.

Yes, the only carry-forward element, Simon, is the deferral element that Roger referenced that obviously bonuses are deferred over three-year periods. And because of the very high levels of bonuses in 2015, the deferral element in 2016 from -- related to those is higher than the equivalent period last year and that's about GBP6 million.

That's offset by the reduction in the share-plan costs that would come through. So, those two about wash themselves out, but you need to remember that element. And, therefore, the deferral element for this, going forward, will be lower next year than what you have it this year.

Sure. Understood. And just on the finance income of GBP5.5 million, I'm just again wanting to get a handle of what that might look like for the full year. And just in light of what you mentioned before in terms of now going to net cash.

So, again, that GBP5.5 million you should consider it as run rate.

Yes. And last one, I'm sorry if you mentioned this already, Roger, but the absolute return funds in terms of that high-water mark, can you just give me a bit of a handle in terms of how far they might be off those?

So, that fund has quarterly performance fees. It paid a performance fee in the first half. It's slightly behind in the second half but -- one or two.

All right. Thank you very much.

Nigel Pittaway, Citigroup.

Hi, Andrew and Roger. Just wondering -- just one question, actually. I'm just wondering if I can delve a little bit more into that variable-cost reduction. It seems to be quite a bit more than justified by just the reduction in performance fees. You've obviously mentioned there's five down for the share price and six up for the roll through of bonus deferrals. Can you give us more colour about what explains the remainder of the movement there please?

Look, I think, Nigel, the main thing would be, as we said last year, that the variable comp reflects the overall shape of the business. Some of that's obviously performance-fee element, then the other element is the success of the business. And that's judged on investment flows, it's judged on investment performance.

Both of those are softer than the same period last year. A number of business metrics associated with that, the financial metrics of the Group, which are softer than where -- what were a record period in 2015. So, not surprisingly, the overall bonus pool for the Group is going to be lower than we would have applied for last year. And that's what you're seeing in these numbers as well.

Okay, thank you.

David McCann, Numis.

Morning. Just a quick one. What is the outlook for performance fees as you see it today?

You know it's my favourite question, David. I think the only thing I would say is that normally we say that the first half -- performance fees are weighted towards the first half and that's because the long-only SICAVs have a crystallization date of 30 June. So, you've got that in the first half and not the second half.

Obviously they didn't, as I've described early, crystallise in this period. So, you probably haven't got that first half/second half bias that we've had before. But, obviously, actual performance fees in the second half will depend on actual performance.

I would add to that, David, that the, obviously, the breadth of our funds that pay performance fees remains there. It was nearly 30 funds in the first half. We continue to have a broad-based book of business. So, whilst performance fees have been held back this year to the same period last year, there still remains healthy potential performance fees in the Group.

Okay. Thanks.

Anil Sharma, Morgan Stanley.

Morning. Apologies. I joined a bit late, so I'm just wondering has there been an update on the non-comp cost guidance at all?

So, overall, Anil, the guidance I've given for fixed costs in total is similar to the guidance at the beginning of the year, which is high single digit. That includes the FX impact. I'd said was slightly higher on staff costs, slightly lower on non-staff.

Got it. And does that include any additional costs which you think you might need to incur following the referendum?

Again, Andy talked a little bit about this earlier. In terms of the operational impact then we think that's fairly minimal. Again, and we think that will come out over the next few years. The potential of us needing to add a handful of people in Luxembourg but, again, that will be totally insignificant to the results of the Group.

And we'll be [settling] these down the track.

Thank you. Got it. And, sorry, just a last one from me. I didn't catch any -- what you said in response to the revenue margin on the retail book. If you could just repeat that for me that would be helpful.

The revenue margin so, yes, it's come down from 73.5% to 72%. That's -- we've always talked about margin pressure of a basis point or two a year and a little bit of a mix impact. So, 72% is the exit rate.

Okay. And that's just, what, you've cut prices? Or competition? Or what's happened there within retail?

Sorry, the question is --?

So, you mentioned that you've always talked about margin pressure in the retail book, but I'm just trying to understand - the decline you've seen, has that been driven by an active decision by Henderson to lower some of the fees or has it been competition? Or, is it something else that --?

There's a little bit of competition in there of mix. And there is also -- we are dealing with bigger and bigger distributors and that's where we see -- that's -- I think that's where we see the primary price pressure. But, like I say, that's nothing different than we've seen for the last few years.

Okay. Got it. Thank you.

Nick Burgess, Baillieu Holst.

Yes. Good morning, gentlemen. Just a couple of follow-up questions on the UK property fund. GBP3.6 billion, I think, at 30 June. Can you, firstly, confirm the size when it was suspended?

Secondly, when you talk about rebuilding of liquidity, what level of liquidity do you want or need as a percentage of the fund before you get close to reopening it? And at what sort of comparison is that to what liquidity normally runs at in the fund?

Thanks, Nick. In terms of the property-fund size, you're right, it was about GBP3.6 billion at the end of the year -- at the end of the period and modestly below that, you're probably somewhere near GBP3.4 billion, at the time of the suspension.

In terms of liquidity levels, the fund, we'll say in extreme situations like now you try and build liquidity of around 20% to 30%. They're the sort of levels that you'd be looking to. It was when the fund was dropping below 10% and towards that single-digit liquidity level that the suspension decision was taken. So, you'd want to be going up to that sort of period.

What I would say is the market remains quite open and orderly at the moment. So, we're working hard on achieving appropriate levels of liquidity for the portfolio and to maintain that balance and diversification in the portfolio. Once suspended we said we'll review it every 28 days. So, obviously the fund-management company, the Board overseeing the fund, will take a view at the end of the period, so early in August, to see where the portfolio is in relation to the market at that point.

Thanks Andrew.

Paul McGinnis, Shore Capital.

Good morning guys. Could you just confirm that you're still targeting a convergence of the compensation ratio and the operating margin at around the 40% level? And whether there's a specific timetable around doing this?

So, there's definitely still upside. I think, as I say, our -- keeping the margins constant this year was a good result. You remember when we talked about improving the -- set out the whole strategy around growth and globalisation that was around doubling the business to GBP127 billion.

We've made great progress but we're not there yet. And in addition when you -- Andrew's talked a bit about the new teams that we've added. That's where we've added a lot of investment. And, as we showed you with the performance page, they're performing very well but there's very few of those that are currently at scale. So, getting those to scale and continuing to see scale efficiencies from our infrastructure gives me -- I can see upside from where we are, but we've got to continue to grow the business and leverage those investment teams that we've invested in over the last two, three, four years.

Okay. thank you.

Brett Le Mesurier, Velocity Trade.

Hi. Just one question, back on this margin compression, on retail. Looking at the numbers that you've put out it looks like there's more severe margin compression in UK retail. Is that fair comment?

Is that --? I'm struggling to hear the question. Can you repeat it? The line's not great.

It's on the retail-margin compression. Based on the numbers you've put out I calculated the greatest compression is in UK retail. Is that fair comment?

I'm not sure it is. I'm sorry. The -- and, again, I think there's a number of things in there. Outflows from property will actually improve our margin because that's where we share the revenues with the sub-advisor. And we had outflows from the optimal fund range that was also at lower fees. So, I don't think that is the case, no.

Yes, that was more European. It would be more the European range in the basis that as we've got larger and also the global distributors that we work with, they're looking for more uniform prices. Yes, that's --

And tiering in the US.

Yes, and some tiering in the US due to the success there, as well. I don't think it would be UK.

Okay. Thanks.

Thank you very much. There are no further questions waiting.

Right, well, thank you all for your time this morning and for those calling in from the evening in Australia.

As you can see, whilst the EU referendum result here has had an impact, particularly post that, in terms of the flow picture for our business, the business is in a much stronger position overall. And if we look, taking a snapshot where we are two and a half years into a five-year strategy, we're bang on doing everything we said we'd do with a number of opportunities developing because of the investments we've made. So, in that sense, this is a much stronger and more resilient business than it may have been, say, just five years ago.

And I would also highlight that whilst conditions have been difficult over the last few weeks or so we do see that moderating and improving. And it does not feel like, in terms of client behaviour or market behaviour, anything like some of the more recent crises markets have had to deal with, whether it's the euro back in 2012 or the financial crisis of 2008 and 2009.

But we'll keep working on developing the strategy as we have before. You should expect to see the vigilance in terms of the cost discipline we have. But there's certainly no change in strategy or anything we're trying to do there, because we do see the success that's coming through already for the strategy.

If you have any further follow-up questions obviously the team here, with Miriam and the team in IR, are happy to take any questions today or over the coming days. Thank you.