Janus Henderson Group PLC (JHG) 2012 Q2 法說會逐字稿

Good morning and good evening to those on the phones in Australia. Firstly hopefully everyone's had a great time these last few weeks watching the Olympics that were hosted here in London. It certainly was a fantastic display living in London and experiencing that. Certainly all the athletes who competed and how London coped with it all. But given Team GB's performance, particularly against my home nation as I keep getting reminded, I guess I'll have to be traveling under my British passport for a while, but I do have to give credit to Team GB for what was an excellent performance and for London putting on a great games. And for those in Australia, apologies for it surpassing Sydney on all accounts from what I can see.

I'd like to start the results with a quick overview of the first half, focusing on the key business results and the performance indicators we look at. Shirley will delve into the financial results in more detail then I'll recap and say a few words on our priorities for the rest of the year. We'll be happy to take questions from you at the end.

At the time of our full-year results I spoke about our concerns for market levels and economic growth. Despite markets starting the year in a relatively buoyant mood we remained cautious about the outlook. This caution was warranted and we saw as the first half progressed the eurozone crisis deepen, global growth slow and a renewed uncertainty over parts of the global banking sector. As a result of this investor demand for risk assets deteriorated throughout the half. Given our predominantly European mix of both funds and clients we were impacted by these events with new business growth remaining under pressure.

That said, despite these headwinds the Group's financial strength remained intact with good cost control resulting in a GBP79m of underlying profit before tax. Diluted earnings per share of 6.6p was up on the second half while slightly down from the first half of last year. Our operating margin showed further improvement to just under 37% as we remained vigilant on costs despite selectively investing in the business.

The compensation ratio was lower at 39% compared to 43.5% in the first half of last year though comparable with the second half. This reflects both the benefit of a full half of Gartmore and lower variable compensation driven by, in particular, lower performance fees earned in the period. In line with our dividend formula the Board has declared an interim dividend of 2.1p per share which will be paid to shareholders on September 21.

Investment performance overall remained good with 66% of funds either meeting or exceeding their benchmarks over three years as at the end of June. Assets under management remained relatively stable at approximately GBP64b as net outflows were largely offset by positive market and FX movements. In terms of balance sheet strength and financial strength we continue to generate good cash flows and repaid our 2012 debt in full. This has left us with a small gross debt of GBP150m and a modest net debt position.

Before I hand over to Shirley I'll take a closer look at how we fared on the main KPIs we monitor. Consultants and our clients look more to the three-year or longer term in the performance of investment funds and as mentioned earlier our performance on this basis continued to be good. The one-year numbers are also showing improvements year to date. As at asset class level, performance in our fixed income funds continues to be excellent over all periods and our equity funds have competitive performance over both periods. Lack of economic growth in the UK and Europe continues to impact the property performance.

Turning to our business lines at the top of this slide, in UK retail performance over three years this remained strong while the shorter-term numbers have improved this year. We have a solid line-up in our European SICAV range and performance continues to be strong over all periods. However the exposure in this channel to European equities has meant our performance is not currently translating into new business growth.

The performance of our US mutual fund range which was impacted by the underperformance of the International Opportunities fund in 2011 has steadily improved and our flagship fund is now top quartile showing a positive return of 6% year to date compared to the index benchmark which was just up over 3%. It has recently retained its Morning Star four star rating.

Along with the industry, our absolute return funds were tested by the volatility in markets. In aggregate our absolute return funds have delivered a one-year return of minus 3.5% whilst year to date they are up just over 1%, which is marginally lower but consistent with the European Long/Short index for the same periods. The weakest performance has been in some of our Asian funds although we have seen solid performance from our credit and global multi-strategy funds.

The institutional business, as you can see here, continues to perform strongly.

Despite the more difficult trading conditions and the macro backdrop we have continued to make progress on improving our overall Group margins. In the first half of this year both the management fee margin and the net margin improved as a result of the benefits of the Gartmore acquisition and also our continued discipline on costs. Our total fee margin fell slightly in the first half, reflecting the lower level of performance fees earned in the period. Overall we expect to maintain the current management fee margin of 54 basis points for the second half of this year.

New business growth has not met my expectations so far this year and both retail and institutional sales continue to suffer from the effects of the euro zone crisis and ongoing risk, investor risk aversion. With around 80% of our assets under management sourced for clients in the UK and Continental Europe and around 60% of our assets invested in these territories it is a struggle to encourage clients to invest at present. This is despite, as shown on the previous slide, our solid investment performance.

It is important we set out the reasons as we see them for the flows in the business because this links directly into the activities we have undertaken so far this year, and I'll say more about these shortly.

Despite solid growth flows net sales growth in UK retail has been held back by advisors repositioning portfolios for their clients ahead of the implementation of the retail distribution review due to come into effect in January next year. The timing and scale of these movements has exceeded our initial projections and is expected to continue through to the year-end. We are making progress on positioning the Group to improve the position post-RDR and I will touch later on what we've been doing.

Our US mutual fund range got off to a reasonable start, but with eurozone concerns intensifying and US investors shunning equities, particularly European-biased equities, our net flows in our US retail range have turned negative for the first half.

Our European retail SICAV range ended the half flat and given the market backdrop this is actually a good outcome. We have seen however clients continue to remain risk-averse with more moving away from equities towards bonds within that shift.

Turning to institutional, net outflows have slowed from recent periods. However clients continue to rebalance their portfolios, either into global mandates or where they've been subject to pension buyout arrangements. Given the strong performance we've delivered to institutional clients, reflected in both the client returns as well as the performance fees we've earned in the period, it is clearly a disappointing position to be in. At the end of June we had a positive net pipeline of client commitments but given the uncertain timing of when flows actually occurred it's hard to predict what the net position may look like for the rest of this year.

Taking a closer look at absolute return funds, outflows continued in 2012 due to some underperformance mentioned earlier and the lower demand for Europe, Japan and Asian strategies. Our equity long/short range typically focused on capital preservation during such turbulent market conditions and most of the funds have done a good job in this challenging environment and are well positioned for a rebound. This does remain a priority growth area for us and we continue to focus on developing new products, strengthening our current range and diversifying into other strategies.

The positive net flows in property are largely as a result of the acquisition of Horizon Investment Management France, our privately owned French property asset management business, that added approximately GBP180m to our assets under management. We also made some investments on behalf of our clients and launched new funds such as our Silk Road China designer outlet mall fund. Together these inflows more than offset asset disposals which we made realizing profits for our clients.

It is worth noting that given a large proportion of our assets in property are held in long-term closed-ended funds we face fund expiries periodically. Leading up to these expiries we engage with our clients in order to determine the best solution for them at the time. We recently agreed a seven-year extension for our flagship GBP650m UK Shopping Centre fund originally due to expire in 2014. The fund life will now run through to 2021 with a redemption window available to clients in 2017.

We all recognize the challenges the world faces with economic growth impacted by corporates deleveraging instead of investing and the risk of sovereign default weighing heavily on markets. However we have not and will not sit back and just wait for an improvement. As with all periods of uncertainty, in time they will pass and opportunities will present themselves. We have used this time to continue to invest and strengthen the business.

Our long-term strategic goal remains the same and that is to deliver new business growth of 5% or more from our underlying business. We are clearly not currently meeting that objective but it remains our priority and there are many activities centered around our five strategic objectives to position the business to meet this in the medium term. Of course the only way we will do this is to keep our clients at the center of what we do and deliver investment performance which meets their expectations.

There has been a lot of activity within the Group this past six months focused on improving the position of the business towards delivering on new business growth. We have done this by developing products and forming partnerships to meet client demand, investing in talent and also trying to make it easier for our clients to do business with us.

Looking at products first, you can see here -- and apologies for those who find it hard to read on the screen, you'll have it in your packs -- you can see here the number of new products developed so far this year.

Touching on just a few, together with Sesame Bankhall Group, the largest restricted advisor network in the UK, we launched the Optimum range of funds. This is a risk-constrained RDR-compliant fund range ideally suited for their client base. In the US we launched the All Asset fund, the first of a suite of multi-asset funds we are developing for retail clients. The Dividend and Income Builder fund launched this month will further diversify our US Mutual fund offering. We converted an existing fund into a Global Equity Income fund, a product for which we see demand across all distribution channels and an area where we have considerable expertise with decades of know-how from our highly regarded team.

In hedge funds we launched the new Multi-Manager Diversified fund, a more risk-focused long/short offering taking the best ideas of all our managers in this field. And we expanded our fixed income offering with the Total Return Bond fund and the Multi-Asset Credit fund and we are soon to launch a Euro High Yield Bond fund following on the success of our European Corporate Bond fund.

In property I already mentioned Horizon and Silk Road, the result of a JV in China. We also entered into a JV in Italy to strengthen our property capabilities there, initially investing Italian client money in core European markets.

We have made a number of key hires so far this year. First up Phil Wagstaff joined as Global Head of Distribution responsible for all our distribution efforts, ensuring our teams across the globe work as one, focused on our clients. He has already strengthened his team with a new Head of Retail in Asia and a new MD for our Japanese business and we recently opened an office in Australia led by Rob Adams. On the investment side Matt Beesley joined us to head up our Global Equity franchise and John Feeney will lead a new initiative offering clients exposure to real estate debt, an embryonic but promising new market for us. We will continue to invest in quality people and expect to strengthen the team further as we move through the rest of the year.

We also completed a number of key business partnerships. In the UK market I mentioned the Sesame Bankhall JV. This is an exciting development as we see the restricted advice segment of the market growing significantly in a post-RDR world and Sesame Bankhall is well positioned to thrive in this environment. Together with the clean share classes we have already launched we are well positioned for the post-RDR world by providing a range of products and solutions to the advisor market and their clients.

We have continued with our efforts to simplify our fund range which in so doing makes it easier for clients to deal with us. We have done this across our UK and European retail and our absolute return fund ranges. In the last 12 months we have closed or merged nearly 40 funds.

So each of these activities in turn link directly into our five strategic objectives as you can see here. Every one is to support our new business growth and getting us closer to our long-term strategic goal. There are other activities currently underway and we'll say more on these at the end of the presentation. So now I'd like to hand over to Shirley.

Thank you Andrew. I'd first like to say that the financial results show a resilient business with improvements in our key ratios, continued cost control whilst also investing in the business. You can see the detailed profit and loss in the appendix but I'll focus on the underlying profit numbers and touch on some of the other line items that demonstrate how we manage the business.

Turning to the income drivers, management fees, which accounted for 80% of total fee income, increased by 2% to GBP178.8m, principally due to an extra quarter of Gartmore. This was partly offset by lower average equity markets as well as net outflows from our retail and institutional businesses. Transaction fees were stable at GBP23.3m. Given the sale of the Hermes JV and other smaller items we saw transaction fees fall GBP3.6m compared to the second half of last year. The recurring element of transaction fees which is linked to fees we earn on UK retail funds accounted for over 60% of transaction fees.

In line with my comments at the full year results we earned substantially less in performance fees compared to the same period last year and I will go into more detail on the next slide.

This slide highlights how we continue to manage our -- can we just go back to slide 10 please -- okay, thank you. As you can see on this slide, our underlying profit before tax was GBP79m in the first half. This was 9% lower than in the first half last year for despite having the benefit of Gartmore for an extra quarter we had lower performance fees, lower markets and net outflows over the period. Given the flexibility in our operating costs, especially in variable remuneration, we were able to offset around two-thirds of the GBP30.2m decline in total fee income. I won't go through the income drivers again.

So on slide 12 and performance fees, performance fees from institutional clients were lower than first half 2011, but once again the biggest contributor given the diverse clients and mandate mix. The contribution from Henderson SICAVs and absolute return funds was significantly reduced primarily due to lower market levels compared to the first half of last year, resulting in most funds being below their high watermarks at the point of performance measurement.

As at June 30 81% of the offshore absolute return funds assets under management had a performance fee opportunity of which 73% were above or within 5% of their high watermarks. 77% of investment trust assets under management had a performance fee opportunity of which 97% were above their high watermarks or do not have a high watermark requirement. 64% of the SICAV AUM has a performance fee opportunity of which 69% were above or within 5% of their high watermarks. Investment trusts and the majority of SICAVs also have to beat their benchmarks to crystallize a performance fee. Property and private equity performance fees were higher, contributing GBP4.7m, with our flagship UK Shopping Centre fund contributing to most of the performance fee.

Of our total fund range 38% of our assets under management have the potential to earn a performance fee. That said, the outlook for performance fees for the rest of this year looks challenging and it would be prudent to expect these fees to be in single digits given market levels and the current profile and timing of fund year-ends.

This slide highlights how we continue to manage our cost base in line with our total income. As Andrew pointed out, we have continued to invest in the business and we've done this within an environment where we have controlled costs overall.

You can clearly see here variable staff costs have reduced in a large part as a result of lower performance fee bonuses paid. Fixed staff costs increased by 12% to GBP51.8m compared to the same period last year, reflecting an additional quarter of Gartmore in our cost base and higher pension costs. Our fixed staff costs would have fallen by GBP1.5m in the first half of 2012 compared to the second half of 2011 but were offset by a higher accounting charge, not a cash cost, as a result of the Henderson Group pension scheme trustee shifting from risk-seeking to risk-reducing assets. The increase in fixed staff costs of GBP1.6m reflects this higher pension cost and new hires as Andrew outlined, partially offset by the benefit of cost reduction actions taken late last year.

Looking at the impact on our key ratios, the operating margin improved further as a result of stable management fee margins and the benefit of lower variable staff costs and continued cost control. Lastly, the scale benefit of acquisitions, restructuring actions we undertook in the second half of 2011 and lower performance fee bonuses enabled us to further reduce the compensation ratio to 39.2%. We continue to expect a compensation ratio of around 40% this year.

Turning to other operating expenses, i.e. non-employee related costs, as you can see we have managed these well despite an extra quarter of Gartmore and inflationary pressures. Compared to the second half of last year other operating expenses decreased by approximately GBP1m. As guided, office expenses increased to first half 2011 year levels whilst other expenses improved as the Group settled historical VAT claims with HMRC. Overall I would expect the first half to be a good indicator of the likely run rate of other operating expenses in the second half.

Looking at the financial strengths of the business, we generated good operating cash flows during the period, repaid GBP152.6m of gross debt and interest, and made dividend payments. The gross debt fell to only GBP150m. Our net debt position is modest at GBP62.2m and as it was impacted by dividend and bonus payments in the first half I would expect it to reduce substantially in the second half of this year as strong operational cash generation continues. Our focus remains, subject to external factors, to repay the 2016 notes and to strengthen our capital base through the economic cycle so that we can operate without the FSA consolidated capital waiver in due course.

We have included a slide in the appendix showing detail on tax and tax rates but just briefly our effective tax rate on underlying profits of 10% was much lower than our usual effective tax rate of 20%. The lower rate this year is predominantly due to benefits resulting from the efficient use of tax losses following the Gartmore acquisition. We currently expect the effective tax rate to remain low for this year. Given the nature of some of the tax items recognized in 2012 we would expect the effective tax rate in future years to move back closer to 20%.

I will now hand back to Andrew.

Thanks Shirley. So just to recap on some of the key points. Although it was a challenging environment in which to generate positive net flows, management and net fee margins improved. We managed our cost and as a result our operating margin and compensation ratios have also improved. Investment performance is good with most of our core funds performing well. The business continues to generate good cash flows and we are working towards being in a positive net cash position.

We are investing in our business this year and earlier I outlined examples of a number of activities already undertaken. The retail side of our business is an important component of the future growth of the business. It is highly profitable and has strong long-term growth prospects driven by the pressures for individuals to take greater responsibility for their long-term savings needs.

We are preparing the business for a post-RDR world and our new share classes and fund rationalization has positioned our fund range to meet this. In addition we continue to explore opportunities to position the business in new channels like we have done with the joint venture with Sesame Bankhall. RDR still remains uncertain in the full form and impact it will take and it will be some time yet before we have a fuller picture. It is likely to impact the advisor side far more than the investment management side but as these are our key relationships with our clients we are working hard with them to help them prepare for RDR and position us best to meet their needs as their business models adapt.

We continue to expand and diversify our product ranges in both the US and Europe, incorporating more defensive funds and funds with reduced exposure to Europe. This is not to say that Europe is less of a priority for us as a Group, far from it, but we are already well served with high quality and performing products in this area and we need to be prepared should the current crisis continue.

We continue to develop our global business lines. To complement the hires we've made in global equities we expect to strengthen our fixed income, emerging market and multi-asset capabilities over the coming months. We continue to engage with new managers to expand our absolute return proposition for clients.

We have successfully added new relationships, particularly in UK retail and property, over the period and we continue to work with firms we know well to develop business relationships and ventures which strengthen the proposition for our clients.

Our distribution reach has been strengthened under Phil Wagstaff and he will keep improving how we interact with our clients, making sure they have the access they need and it is easy doing business with us. Many of the IT projects underway are designed specifically to improve client access and reporting.

Finally, as we at Henderson have shown in the past, it is an ongoing priority of ours to remain vigilant on our cost base and in these times it is no less prevalent. Market conditions remain uncertain but I am confident about our long-term strategy and outlook for the business.

Hopefully this has given you a good overview and now I'm happy to take questions, firstly from the floor and then I'll hand over to the Operator for those on the lines.

Hubert Lam, Morgan Stanley. Three questions. Firstly on Q3 flows so far, can you just give us a flavor as to whether or not that's worsened or improved since Q2 and in terms of what products you're seeing interest or not seeing interest in?

Secondly for UK retail, can you explain again why UK retail was relatively weak in the first half and do you expect this to change in the near term pre the clarification of RDR?

And lastly could you just give us an update in terms of the infrastructure lawsuit? Thanks.

Thanks Hubert. In terms of Q3 flows so far, it probably had a broadly similar trend in the retail space. Institutional's very quiet being this time of year so there's nothing, there's not a positive or a negative for institutional. On the retail side we haven't seen much of a difference as what you saw in the second quarter.

I'd say that gross redemptions have probably slowed a bit because of the time of year it is but similarly so have gross sales. It's tough. You've just had two weeks of the Olympics, you've had the July period as well and you've still got another couple of weeks really of the European summer holidays so it's very difficult to take a gauge through here. We have seen obviously markets had a relatively buoyant run the last three or four weeks. That's yet to translate into any increased exposure or flow activity that we've observed.

You asked in terms of particular products as well. It still remains a very defensive attitude from investors. So they are favoring fixed income over equities. In equities they're favoring high-yielding dividend-paying stocks over, say, growth equities, for example. It's no surprise in Europe our best-selling fund range with our European Corporate Bond fund. And despite some excellent performance in European equities we still saw outflows in that space. And I think we were less than the sector but in a number of areas -- some of our best, four of our best-performing products are in the four worst flow outlook in terms of European equity, European markets for example.

Turning to UK retail in particular, I guess the weakness we've seen it's down to, in terms of what we can see it's down to advisors positioning their portfolios, moving towards say life company wraps or into bespoke products that can maintain the margins post the beginning of RDR. So as long as investors -- as long as client activity isn't changed post that then you can continue to get the rebates. And those rules were announced at back end of last year that they clarified the rule about what would happen to rebate after January 1 2013 and from that point we did see a pick-up. And I think you'd probably see an increase in the level of activity driven in the life companies and various wrap-type products associated with that as well.

Now we're probably more exposed than others because the Gartmore fund range, the Henderson fund range and also New Star, because of some of the acquisitions they do, have a lot more tradition of the non-advised books of business from the older days where the advisors who are talking to them are moving them into new funds or we tended to have a broader reach in terms of the IFA channel, particularly New Star were very successful at that.

And what you're seeing is a shift towards discretionaries and also towards restricted advice at the moment, which means some of those smaller IFAs have really been either packing up or getting ready for an RDR world where they've positioned their portfolios to make it easy for them to provide more tailored wealth management solutions but less around the investment solution.

Because of the nature of where the client base we'd had the history and the legacy side of that, I think we have an impact on that through those three different books probably higher than others. And unfortunately also in a number of cases some short-term performance at the back end of last year meant where people were moving into wrap accounts we weren't the chosen default option. So I think that's also had an impact for us.

What are we doing about it? There's not a lot -- we're obviously working on the performance, our fixed income range had a very strong start to the year this year for example. A number of other areas. So emerging markets, we're really not known for that. We are going to invest in new talent in that space. We're looking to hire to strengthen the team. So a number of broader areas to do.

And then I think what we're doing with Sesame Bankhall and there are other such opportunities that we're looking at to try and do similarlies. At the moment the restricted advice channel is circa 20% of the market. In an RDR world we could see that easily doubling and even getting well over 50% as it becomes easier to do business in a restricted advice structure meeting all the compliance and regulatory requirements. So having someone like Sesame Bankhall who's the largest in the market, and there are a number of other parties we'd also like to work with, where we provide the investment management skills, they provide the client servicing skills, enables us to capture a greater level of flows in that channel should that growth benefit.

Now you're not going to see that immediately. That's something that will be a slow build and it will particularly start to become more evident through 2013. And as I said in the presentation, it's still quite uncertain how RDR will affect it and I think you need to have multiple options out there so that as the market develops. But it is starting to clarify itself and I think we'll get greater clarity in the first quarter of 2013.

To your third question around the litigation, really there's nothing further to add. There's been very little progress over the last three or four months. I think I said at the full year results our position continues to remain that we can't see that we have a legal case to answer so we're defending ourselves quite strong there.

It's unlikely -- maybe by the end of the year we might go to court on some of the preliminary issues. They will be more looking at some of the contract with some of the cases of fact rather than getting into the full substance of the claim. So that's probably the earliest that we would see some of that but this could still drag on for a number of periods. But in terms of anything else there's nothing really changed from what we've updated in the past.

Good morning. Jonathan Richards from Merrill Lynch. Two quick questions. Firstly on the IT spend that you guys flagged in your release, I just wanted to know exactly what you were planning on spending that money on.

And secondly if you could just talk about, a little bit about your absolute return fund range. You're seeing a bit of outflows there. Can you give us an idea of if it's performance related, if it's product related, what's getting you excited in the absolute return space? I know that was a big lever for you doing the Gartmore deal. Thank you.

Why don't I pick up on the second question first and then I'll hand to Shirley for the IT spend. The absolute return fund range, the reality of the situation is similar to others. Our three -- one-year numbers were negative, modestly negative but negative, and our three-year numbers are positive but only modestly positive. And that's really not good enough for clients. I think as -- and I'd say that's the industry return as much as we're consistent with that. I don't think Henderson is an outlier within that regard.

We still see very strong demand for absolute return mandates. Clients are seeking a more risk-adjusted structured sort of solution to determine the returns. And they're not looking for huge returns. Typically institutions are looking for an 8% sort of return for their products. The days of saying you must target 20% net just really aren't necessarily what the evidence of a lot of institutional clients are looking for. And our managers are capable of doing that.

It's been a tough period. From a majority of our products are equity long/short and in that case it's been a difficult market given the risk-on/risk-off attitude, the intervention of politicians and central banks in markets have made it difficult. Some of our peripheral products have done very well. Our credit fund, for example, has had exceptional good return and seen some good flows. Our agricultural fund which is trading around futures contracts around various agricultural products has done very, very well as well. So some of the peripheral stuff has done well, but equity long/short, it's just been a struggle I think for the industry and we need to improve the returns overall.

Our focus remains on that area. It's a key market for us. I think it was a key strength of Gartmore and we believe the managers we've brought over from Gartmore as well as the managers in Henderson are extremely good and have huge credibility in that space and also a long term of doing it. We will strengthen the teams if we need to into new areas. So the agriculture team for example only came on board at the back end of last year. We'll keep looking for new teams. Nothing imminent at this stage but I don't -- I wouldn't say we would lose our emphasis on that.

The final thing I would add to the absolute return range is the move towards a whether you call it multi-asset or that type structure is consistent with that search for client looking for a total return rather than the sort of returns they've been getting from say equities. And that's an area you'll see us spending more time and effort on. The All Asset fund in the US was our first retail offering in the US in that regard. It's very early days. It's only been a couple of months since its launch and, as you know, new funds take a long time to build up. But it's performing well, going down well with our advisors that we talk to, and you should expect to see us both invest in talent in that space and also launch new products and similar on that basis.

So I think the trend towards total return, all asset, whatever you want to call them is a trend that we see is continuing. It's now about delivering to the objectives that are set for those. That's the more critical thing.

In terms of --- sorry, second question -- in terms of your question on IT, probably the biggest element of that is what I call globalizing the infrastructure. So whilst we've been doing the acquisitions what we haven't done was link up Asia and US in particular into the central infrastructure. So already this year US has gone live and the next piece is Asia.

Then there's what I call housekeeping IT, which again has taken a backseat through the acquisition. So things like upgrading to Windows 7, the latest versions of the various fund manager and distribution systems. There's client-facing IT that we've been doing, both in terms of client reporting for our institutional client base, which has gone live first in the property area. And then what we've called Digital Future, which is how are we going to interact with clients in the future, so how do we use the new social media-type technology to interact better. And we've made some quite good progress and strides in that area.

And I suppose lastly you'd expect me to say MI. I will say it -- MI, better MI.

Hi. It's Arnaud Giblat from UBS. A couple of questions. Could you run maybe through the economics of the Sesame Bankhall deal? How does that look for you and how does it look for them compared to the traditional product set or the RDR-compliant product set that they will be selling?

And my second question, given your performance on operating costs and the accretion we're seeing in operating margins, is there scope to do more deals here, and particularly adding in the product sets where you're targeting?

Sorry, just that second question, are you saying in a similar vein to Sesame Bankhall or just in general across our business, when you say scope to do more deals?

The comment was the delivery on operating costs and operating margin's been pretty good, so -- and it seems like the Gartmore deal's been bedded down well. So --

You mean acquisitions in general?

Yes.

Okay. Sorry. I just wanted to clarify. Okay. In terms of the Sesame Bankhall joint venture, you won't be surprised to say I think it's commercially sensitive so we're not going to go into the details there. This is a joint venture. It is --- we've both combined our relative skills to create the optimum range where Henderson is the fund manager underlying that. Sesame Bankhall has designed products that meet both RDR, the RDR world and the needs of their clients. So they're risk-weighted funds. There's a range of funds depending on the risk objective of the underlying clients.

We aren't the only provider. The optimum range that they have will be one of a number of providers they have there, but because of the nature of these, these have been designed specifically for their client base with their advisors, we'd like to hope we become the default or dominant force within that. Obviously that's subject to our meeting the investment performance objectives as set out and the service level, but we're hopeful that that will give us a [predominance] with that. So that should lead to generally healthy flows as this builds.

And I think the economics are quite representative to what we get for the rest of our business. It's lower than our retail business, as you'd expect, because it's more like a sub-advisory type relationship. That said, it also has lower costs associated with it given the JV also picks up a number of the costs that fall to the Sesame Bankhall side. So from a contribution element it's not far off what we would get from a normal retail fund, though its headline management fees would be lower than our existing retail margins, but I won't go into the details of that.

Your second question around M&A in general, look, it's, at the moment it's not the priority for the Group. The priority for the Group is to sit there and get the business delivering on its business objectives, which is organic growth. And that's got to be the priority. And at the moment the activity underway in the business is to achieve that. We've done some small acquisitions. The Horizon business in France is, property business in France is a good example of a small deal that helps address and take our business forward, but that's more the sort of thing you'd see. Very modest outlay for us to do that. Help strengthen a proposition that we offer across the board rather than doing anything else.

There are a number of opportunities in the marketplace, as you know at the moment. None of them would interest us that's been discussed. Really our focus really is on existing business.

Thank you.

Just a couple of quick questions. Nitin Arora from HSBC. Just going back on absolute return again, so just trying to square up the comments. You're saying that all one-year funds have delivered negative returns but they are in line with the industry. At the same time if I look at the performance sheet it says like 22% of absolute return funds are above the benchmarks. So how do I square the two comments there?

Yes. Because the -- what we're saying is if you took the average of our fund, it would have delivered 3.5% negative on a one-year basis. Now that doesn't -- that's the average. Some funds will have done worse than that; some will have done better. So some are positive and above their high-watermarks, which is the 22%. Some will be worse than that.

The industry's done around, over the similar period -- we tend to look at the European long/short index which is probably the biggest -- the closest representation to the fund range that we have in [YRUM] and that's probably down around 2% to 2.5% over that one-year period. So the industry itself in aggregate has had a negative year and we're about 1% short in aggregate on our funds from that, not too dissimilar, but overall, which goes back to my comments that the industry isn't really doing what clients would like.

Now within that obviously you're going to find a range of different funds, some having actually a very strong performance and some having a much more negative performance than that shown there, so that's how you get to that. And I think the Henderson range, particularly the Gartmore funds that came over, even if they've had a negative performance have been very modest. So they're there or thereabouts with their high watermarks, but they need to see a strong performance to deliver to the client objectives and then to deliver the performance fees that we would expect from that.

Okay. Then secondly on the institutional side, given the performance is very strong there on institutional mandates, but outflows don't seem to get better over a period of time. So what have you seen? Is it the gross inflows have been reducing or the gross outflows are picking up for you?

I'd say it's more the gross inflows. Any institutional book of business will have -- mandates will come up for expiry. And we probably feel we've been hit disproportionately by particularly pension buyout funds, and maybe that's the fact that we've done a very good job for the clients. They've got to a level of surplus that they feel they can actually go to a pension buyout arrangement. So we've had a number of -- there hasn't been a huge number done in the UK and we seem to have a disproportionate exposure to those that have been done. So that's been one impact.

On the gross inflows, what you're seeing is the majority of RFPs and mandates out there are being awarded into a global mandate at the moment, whether it's global emerging market, global equities or global fixed income. And it's unfortunate that our product set is much more regional and our recognition. So whilst we're very -- we have strong consultant ratings, they're not in those global areas. So global equities we sought to address through Matt Beesley being hired at the beginning of the year. It'll still take a while before he turns what's been a good start to the year into consultant buy ratings. Emerging markets is an area where we know we need to invest and we're looking at investing in that space.

And on fixed income, extremely well regarded UK and European fixed income. We don't have a presence in the US to be able to genuinely compete on a global scale to the likes that the consultants would like. We expect to have that in place by the end of the year, which will then give us that ability to be able to offer truly global products in the fixed income space. But again that will take a while before the consultants will be comfortable with that to-buy rate.

So what you're seeing is where -- there are a reduced level of inflows anyway, gross sales in the institutional space, and where they are in categories that we just aren't considered in the top four. That's the reality of it. So it's much more a gross inflows.

On the redemption side, we've been hit disproportionately by some areas. I'm not worried about that particularly given the strength of the performance. It'd be different if it was a performance issue. And I think we're probably through the worst of that. There's only so many times three buses can come along in a row and I think we've had those now so we're probably avoiding that period, I would say.

But the inflow situation won't change unless people shift from -- what we could see a big change in and I think if the eurozone crisis receded to some extent, people got more comfortable with it. Because valuations in Europe look comfortable and actually European equities, for example, have done better in some cases, for example, than a lot of emerging market equities, depending on the period you look at. If people got comfortable with Europe and said actually you know what, my exposure is very low because a lot of people have pulled away from it, we're really well positioned in that regard. We've got some great products well regarded, so we should benefit in that regard.

But the politicians have proven time and time again to be very slow to act and to not be very definitive in what they're addressing of it. So this time last year I would have felt that politicians could have addressed the eurozone crisis quite swiftly and a lot cheaper than what it's going to end up costing them because of their dithering. And I still don't have confidence in the current discussions out there leading to any sustainable long-term solution. That could change quickly, but that would be my view at the moment.

Thanks.

Hello. Arun Melmane from Canaccord. I had two questions. Just one on -- because you don't give gross flows and -- gross inflows and gross outflows, I was wondering how your overall gross sales did as a percentage of what this franchise can call, probably in the half year or the quarter.

And the second one I had was on fixed income. I see performance is quite strong in the fixed income space, but you're still seeing outflows in that asset class. Is there anything that you're doing to fix that or is there any color around -- was that a big mandate or what moved that number?

Gross flows, it's not something we've disclosed because I think there's a lot of noise in that and probably gets undue discussion sometimes. I'd love to get away from quarterly, demonstrating quarterly flows quite frankly because I don't think it's really helpful for a business. Trying -- clients tend to judge us on three years or more performance and looking at quarterly flows is not what I think is the most helpful sign for any business. But we have our requirements which we do publish those.

So on the gross flow side, there's nothing -- we talked there about the gross flows and institutional probably down on the inflows. On the retail side it's been something that's slowed as we've moved through the year. So I would have thought the beginning of the year started at normal levels, maybe a touch lower than normal levels, but probably slowed as the eurozone crisis came. What you saw was the paralysis of investment, so there wasn't a lot of activity. And gross redemptions didn't really ease up. They stayed at a steady picture. So there was a sense that, looking at our numbers, it is evident that people are just sitting on their hands.

And it pretty -- it went really quiet from June. So normally you'd find the July and August months quiet months. We actually saw it accelerate this year to probably June because the eurozone crisis continued to be there as a concern and people just said hang on, I just -- I just don't know what -- I'm just not going to do anything. And that's really been evident, which is generally a good sign because gross flows -- the savings are actually banking up somewhere. They will come back at some point, but that's what's impacting us. And that's probably the extent of what I'll disclose on gross flows.

On fixed income, I think I've covered most of the areas on fixed income. The biggest thing that could affect us, benefit us would be having a global reach rather than a European reach. The biggest -- and that's obviously actively what we're looking at doing. I expect to have that in place by the end of the year. The biggest outflows that affected us were the buyouts, pension buyouts where there was probably, what, half a dozen, David, that affected us in the first half. It's a reasonable number when there was probably only something like 10 pension buyouts done over the half. We had six or so of them with clients.

Disappointed because you saw in the performance -- you saw the performance numbers, these were the performance fees that were a driver there. The other thing if you're looking at the flows, and most of outflows did come in the equity side of the business, the fixed income, we had some -- our retail, fixed income retail funds had a tougher year last year, their first decile year to date. But that at the beginning of the year saw some outflows associated with that. So that may well -- that's also in the mix if you're looking at the slide showing it by asset class.

Any other questions from the floor? Okay. We'll go to the operator.

Thank you. The first question from the phone lines comes from the line of Nigel Pittaway. Nigel, your line is open. Please go ahead.

Thank you very much. Hi, Andrew, Shirley. Nigel Pittaway from Citi. Just a couple of quick questions on the cost slide, slide 13. Just I think when you were going through the explanation of the fixed costs you did mention this Group pension scheme item that's obviously added to the fixed cost there. Can we just be clear first of all that that's a one-off impact?

And secondly, are you able to say exactly how much that impacted the fixed costs?

Yes. Firstly the impact is about GBP3m in the first half. And it's because there's a lower expected rate of return on the risk-reducing assets than the return-seeking assets. The pension scheme de-risked from about 53% in risk-seeking assets last year to 74%, 75% by the year end. So it was a significant shift in 2011. We wouldn't expect to see a shift of that size in one year again.

But your question as to whether it's recurring, yes, it is recurring because it's a result of that shift from return-seeking to risk-reducing assets. So unless something becomes fundamentally different in the return on risk-seeking assets, that will be there indefinitely.

Okay. And then just on the variable cost, previously you've obviously commented on how important the accruals are in the first half. Can you give us any idea as to what you're assuming in terms of your accruals for the second half on those costs, because obviously that was a big reason for why they came down so much in the second half of last year?

Are you talking about the variable staff costs?

Yes, I am. Sorry, yes.

Yes. The variable staff costs, the big drivers for that are obviously the profitability of the business and the performance fees. And in the first half you can see the performance fees dropped quite dramatically. Markets were slightly higher in the first half this year than the second half last year, which pushes in the other direction. But the various sales incentive schemes that form part of that as well are obviously impacted if there's lower net flows than we would have expected. So there's a lot of variables in the mix, Nigel, but the biggest driver in the first half is the lower performance fees.

Okay. So you're not really able to say what you'd assumed in terms of second half, I guess?

I think the one thing Shirley did say is that the compensation ratio should be broadly around that 40%. So that gives you a guide of how we would expect it all to come through and from that you can get a sense of what the variable costs will come from.

Yes. Okay. And then just perhaps a broader question, just on the -- I realize you're saying that you're still not certain about the final impact of RDR. But previously you've said I think it has a -- it's likely to have a high single-digit impact on margins. So firstly are you still sticking with that sort of commentary?

And secondly, I guess if that is the case, how soon do you think that will impact?

Yes. On the margin side, look, I think the thing that's probably surprised us more has been the volume rather than the margin impact. So I wouldn't be changing from the margin impact.

And when others talk about margin impact, you've got to remember that our book at the moment has an average margin of around mid 70 basis points. So it's already what I would call an intermediated book where the discretion's already in there. Some of our competitors have a much higher average margin for their retail book, reflecting either direct business or historical business. And when they talk about margin decline, they're looking at getting more towards the average of where we are, I would think, rather than that. I think you need to look at where the parties we're talking about are coming from.

From our point of view it still would be that order of maybe 1 or 2 basis points a year would be an impact. We're not really seeing evidence of that at the moment in terms of the discussion in the pricing. It's more a volume impact that's affecting, so I'd stick to the view at the moment, as you said, high single digits is the upper end of what we would expect to be the impact on a margin side. If anything at the moment that would still remain an upper-end estimate rather than a central case.

Okay. Great. Thank you.

Thank you. The next question today comes from the line of John Heagerty of Credit Suisse. John, your line is open. Please go ahead.

Thanks very much. Just a quick question for Shirley first off. Just on the share register cleanup, are we expecting any P&L benefit from that in the second half at all?

Yes. The share registered cleanup, that's reduced our number of shareholders from about 111,000 to 40,000, so quite a substantial reduction. The payback period for the cost of running the two exercises is about two years, so there will be some benefit in the second half but it'll take two years to pay back.

Okay. Thanks. And just another question for Andrew. On the sale of new products so far from Optimum, have they actually started selling those yet or is that just in the lineup to go from Jan 1?

The range is live. It went live within the last four weeks, I'd say. It's a modest, encouraging start. But like all new fund ranges, they start very slow and will take a while to build up. Also its bigger impact will come post the RDR world where the next three to six months will be about training. They've got to get their advisors compliant and registered and through all the hoops that they require for IDR. That's really the focus. So if you're an advisor sitting in Sesame at the moment you're going through a whole heap of training and regulatory workshops, which isn't really getting you in front of your clients yet.

So we're encouraged by what we've seen, but it's very, very early days. And a bigger impact will come next year once it's fully up and running. But it is up and running.

Thanks. And just finally, if I could, just one more question for Shirley. Just on the expected finance cost for the second half, just wondering exactly when the debt was paid down and when they did a calculation for the second half.

Yes. The debt was repaid on May 2.

Okay. Thanks.

Thank you. The next question today comes from the line of Ryan Fisher of Goldman Sachs. Ryan, please go ahead.

Thank you. Shirley, just a question for you. You've mentioned the expectations for the comp ratio to be around 40%, which I think is similar to what you said at the start of the year. I think at the start of the year you might have mentioned a target for the operating margin that's lower than that to get towards 40%. Is that still feasible? And particularly is it feasible without performance fees kicking back up?

Yes. It is our target to move towards 40%. But as you rightly point out, that would be unlikely without performance fees kicking up in better markets. The range that we're in now is where we expect to be for the moment.

Okay. Thank you.

Thank you. The next question comes from the line of Naveen Patney of Commonwealth Bank. Please go ahead.

Hi, guys. Just had a question firstly on the fund flows. Obviously GBP1.7b of outflows over the half, ex Phoenix. Can you talk about how much of that related to fund mergers and closures post the acquisition of Gartmore and how much that's normalized in the outflows?

Yes. There has been some impact because we have been merging some funds. But I would have thought that's pretty modest. I wouldn't like to pin my hat on saying that the outflows were driven by the merger impact. We haven't actually looked at it and broken it down that way, partly because I didn't want to use it as an excuse internally as to the delivery in that sense. So there were some impacts of that. I wouldn't say it was huge.

Okay. And just another question on the operating margin. Obviously the 40% guidance in this year. I know performance fees is having an impact, but I was just interested in your comments on whether you think you can continue over the longer term to drive that down, just given obviously you've come off a long -- a high base and your operating margin looks more in line with your peers now. What do you see as the medium-term trajectory of that operating margin?

I'm not sure whether you're talking about the xcompensation ratio or the operating margin there. The operating margin, the medium term, it is our -- we would like to try and get to 40%. But that won't happen in these markets or without the benefit of performance fees. The compensation ratio, as I've said, for this year around 40%. We wouldn't expect it to drop much below that in -- even in the medium term.

Okay. Thank you.

Thank you. The next question comes from the line of Anthony Hoo of Nomura. Anthony, please go ahead.

Morning, guys. Just on the topic of performance fees, firstly looking at the number half on half, there's quite a significant increase particularly in institutional client funds. Just trying to understand was there anything specific or one-off in there or was it just simply because of bad performance?

Performance fees, the calculations for performance fees, particularly on institutional clients, are all different, as you'd expect. They're specific to the client. I think if you look across a number of funds that contributed, 30 funds contributed this half, 27 in the same half last year and 10 in the second half of last year, so there's a pretty diverse mix of clients contributing to those funds.

And in terms of the outflows that we've seen in institutional clients in the first half, those were not predominantly from performance fee-paying clients. So I don't think this is unusual. The institutional client base has been pretty resilient in terms of paying performance fees.

Thanks. And just as really a question as well, in one of your slides you've got -- you show the proportion of your assets under management that are subject to performance fees. If you look at it, that's been trending slightly down over the past three halves. Can you comment around your medium term, what's your outlook around performance fees and what the sustainability is? What's the right level of performance fees?

Yes. The main reason for the assets under management performance fees going down was when we acquired Gartmore because although it obviously had absolute return funds with performance fees, the OEIC range and Gartmore's SICAV range don't carry performance fees. So that was the main driver of the shift at that point.

Okay. And so if we look at it excluding the acquisition, the Gartmore acquisition, can you give a sense of whether that number's actually gone up or down in terms of proportion of funds with performance fee potential?

It has gone down because some of the institutional outflows we saw generally all had performance fee elements to them, so that's been where it's probably been impacted. Other parts of our business have probably been no different. Retail typically doesn't have a performance fee on it except our SICAV range. Obviously our absolute return predominantly do, as do our, majority of our institutional mandates.

And property.

And property have longer-term performance fees based generally on end of life of funds.

Okay. Great. Thanks.

Thank you. The next question comes from the line of [Ithmar Tesovic] of JP Morgan. Please go ahead.

Hi, guys. Thanks. Just a quick question on the finance income line. Is that -- what's in that line and how do we think of that going forward? It edged up a bit this half.

Yes. It's edged up this half because we realized some profit on selling some C capital investments, so that is something that we do from time to time. You won't see it in every half. It doesn't of course affect the operating margin because the finance income and expense is not part of that margin.

Okay. Thank you.

Thank you. The next question comes from the line of Daniel Garrod of Barclays. Please go ahead.

Yes. Good morning. Good morning, Andrew. Good morning, Shirley. A couple of quick ones for me. I just wanted to pick up on I think you said expectations of revenue margins holding flat for the full year at the 54 basis points. I just wanted to clarify that point.

You obviously -- you sound a little bit disappointed with the retail outflows in the second quarter and you'd indicate that Q3 is proceeding so far in a similar vein to Q2. And if you break it down by asset class, it looks like strongest outflows out of the equities area. So this would suggest you're losing assets in the highest revenue margin areas. So what is it -- what am I missing in terms of the offset that you've got confidence that the revenue margin would remain roughly constant at the 54 basis points?

Second question around performance trends. In your equities area, 66% outperforming benchmarks is slightly down I believe from the level at the full year '11. I think that was 71%. Can you give any color around within the equities area specifically which particular funds have contributed most to that?

And then within that, the performance of US mutual range seems to be pretty disappointing still. Are there any initiatives there that you can get that performance up? Is it just the bias of the book there that's causing that? Thank you.

Okay. I think there's more than two questions in there, but --

Sorry.

I know you're an analyst so I'll assume you can't count.

Quite correct.

Firstly the revenue margins, did I say that they expect them to be flat? Yes, at 54 basis points. So that's what we're seeing. That's what we expect.

Your point about outflows in retail and higher margin, I guess the scope of the outflows we saw were broad-based actually across retail and institutional, and broadly consistent with that trend. And I don't see that necessarily changing. Obviously the mix did change dramatically, so if we actually saw inflows in institutional, for example, and outflows in the hedge funds or the -- on the retail side, that would have an impact. But that's not our experience or our expectation that you'd see that mix change. So it feels like it's okay. I could get it wrong, but that's the best guidance.

We're certainly not seeing pricing pressure as a driver for the margin coming down. So if there was a shift in that mix -- in that number it would be because the mix rather than underlying pricing pressure in each of the areas. But that's the best guidance I can give you at this stage in that sense.

And you're right that the retail outflows are disappointing, which clearly was not what I'd like to be seeing. I would like to hope that the activities were underway, we'd been addressing that. I can't tell you that the activities we've done in the first half or coming through in the second half will necessarily impact them in the short term, but I do believe absolutely that they will improve the medium-term and the long-term aspects of the business and that we will see an improvement. It's just it's getting difficult in just the short period of a couple of months to see that have an immediate turnaround.

So to go into your performance trends, you said from last year that the number had dropped from 71% to 66%. I didn't have that. I had the full year was at 66% and it stays at 66% on a three-year basis, and the one year was 59%, rising to 61%. So I don't think, if anything, the one-year has ticked up very slightly and the three-year has stayed the same. But if there's something I'm missing, point it out to me and I'll try and answer it.

In terms of US, look, you're right. It is an area that's been weak for a couple of years now. And 2011 actually has started -- the fund -- it's really one fund, the US International Opportunities fund, the Henderson International Opportunities fund. We have actually changed managers, the lead manager on that fund. I wouldn't necessarily say that's changed the process. The lead manager retired, having run the fund for over 10 years, and he's handed over to a manager which has also been running one of the sleeves in that fund for the same period, so very well known to clients.

Performance has improved in the first six months, as I said. It was actually, I think it was top decile actually for the six-month period. So if you ask me what do I need to do, I need to just keep doing that. If the guys keep doing that for the rest of this year, that will see a material impact in the rating. And so far it looks okay. It's started the year as you'd want to hope, seeing a recovery, seeing decent performance. We just need to hold that through the rest of the year.

We were doing this last year and then had a very bad third quarter when the eurozone crisis really impacted market, which knocked the numbers in 2011. When you look at the outflows that that fund experienced, they were actually pretty consistent with the sector it's in. It's just a sector people didn't want to be in. The question, the reason we really need performance there is I do expect clients to come back to that sector and when they do, they will start to look much more at performance then, so it's really important we address the performance issues now so that as appetite comes back in the coming years, we're the right person to come back to, otherwise we'll miss any outflows -- inflows.

I don't think we're impacted on outflows by it, but I think the question would be getting inflows if we don't turn the performance round. The guys are doing a good job to start, they just need to keep doing what they've done so far for the rest of this year and I think that'll put us in a pretty good space. So does that cover those questions? Is there anything on that other than the performance numbers you wanted?

Yes. Thank you very much.

Okay. Thanks.

Thank you. The next question comes from the line of Mark Hancock of Precept. Mark, your line is open. Please go ahead.

Good morning Andrew. Good morning Shirley. Congratulations on the Olympics, I think. Which side were you on? I don't know, Andrew.

I'm Team GB now.

Just a couple of questions, maybe three. Just firstly in deployment of the cash flow, could you just comment on how you see you're deploying the cash generation going forward once you've repaid the remaining debt?

Secondly on the tax rate, how much longer can we see this low tax rate? How long would it take to add some tax back to the more normal 20% rate?

And just thirdly, what is the current headcount? I think you last reported 1,056 in May as at the end of March.

Okay. So I'll take those in reverse order. The current headcount is 1,062.

Tax rate, we expect it to be back at a 20% effective tax rate in 2013. The nature of the losses are recognition after the Gartmore acquisition. So once they're recognized, although they'll come through in cash over a number of years, they're recognized in the P&L at the point when you think you're going to be able to use them. So that's why there's such a big impact in one year. This was a benefit that we didn't anticipate at the time of the acquisition and I think at the full year we talked about still looking for things that we could realize from that acquisition.

In terms of cash flow generation, the debt is not due for repayment until 2016. Our aim is to continue with strong cash flow generation through the economic cycle so that we can repay that debt and improve our capital position so that we don't need to rely on the consolidated waiver from the FSA. If you look in the interim report and accounts you can see that for this period our operating cash flow generation is more or less the same as our profit after -- number, the [45/45]. That does include some impact from the managers' feeding account, which increased over the period. But that will give you a sense of how the cash generation is coming through in what for us has been a more normal year without noise from acquisitions and so on.

Okay. Thanks very much, Shirley.

Thank you. (Operator Instructions). And we have no further questions coming through from the telephone lines.

Okay. Thank you all for your time today, those in the -- giving up their evening in Australia, and obviously those here in the office in the UK. If there's any further questions you have, if you want any follow-ups, please contact Mav or Bojana who I'm sure are happy to address any of those. Thank you very much.