ANNUAL REPORT AND FINANCIAL STATEMENTS 2011 | 15
Our trading performance and outlook
Institutional: Third-Party and Strategic Partner business
F&C is a leading provider of services to institutional investors, which we broadly categorise as either third-party institutional business or “strategic partners” for whom we principally manage insurance assets. We provide these clients with both portfolio management in multi-asset and single asset class mandates and, increasingly, investment solutions such as liability hedging strategies and shareholder engagement programmes.
Our largest markets for third-party institutional business are The Netherlands, the UK and Germany. Institutional assets under management, excluding strategic partner assets, were £27.1 billion at 31 December 2011 (2010: £24.7 billion) representing 27 per cent. of our total assets under management and some 27 per cent. of 2011 net revenues.
Mandates in the institutional asset management industry are predominantly intermediated through firms of investment consultants who advise pension schemes on manager selection and asset allocation. In recent years F&C has achieved a much improved position with investment consultants, with a total of 70 individual product buy ratings at the end of 2011, compared to 28 four years ago. Consultant support and competitive performance resulted in a 28 per cent. increase in gross sales to £4.6 billion during 2011 (2010: £3.6 billion). After allowing for outflows, this resulted in net inflows of some £0.3 billion. Additionally, at 31 December 2011 the business had won a further £1.2 billion, pipeline of institutional new business that had yet to be funded. In line with the strategy announced in October 2011, we believe this business is well positioned for growth as we have strong track records, significant scale and consultant support in a number of core capabilities which are seeing strong demand from pension schemes and insurers. These include fixed income and solutions to help immunise liabilities.
F&C manages significant assets for a number of strategic partners: Achmea (The Netherlands), Millennium BCP (Portugal), Friends First (Ireland) and Friends Life (UK). These assets principally comprise insurance funds but also include sub-advised mutual funds and certain pensions scheme assets. These are long standing relationships which have generally provided us with exclusivity to manage the assets of these partners for a minimum period of time. An exception to this is the Millennium BCP relationship in Portugal, which is principally represented by a BCP-Ageas insurance joint venture, where that exclusivity period has already come to an end. We are in discussions with BCP-Ageas regarding the longer-term nature of our business relationship. At 31 December 2011 assets under management for strategic partners were £60.2 billion (2010: £67.0 billion) representing 60 per cent. of our total assets under management. Due to the lower fees that we receive for managing these assets, our revenue from strategic partners is considerably less at some 30 per cent. of 2011 net revenues.
Partially due to the maturity profile of some of the underlying insurance products of our strategic partners, there has been a longstanding trend of annual net outflows. In 2011 net outflows from strategic partners were £7.2 billion (2010 : £1.5 billion). 2011 strategic partner outflows were exacerbated by the partial nationalisation of the BCP Pension scheme by the Portuguese government and the sale of a French subsidiary by Achmea. We have been notified of additional outflows totalling £3.3 billion
which will occur during 2012, from the BCP Pension Scheme and Friends Life.
Friends Life has set out its intention to establish an in-house asset management function and, as previously disclosed, has served notice to withdraw £2.3 billion of assets at the end of this year. Our expectation is that all or most of the assets that we manage for Friends Life may be withdrawn at the expiration of the contractual exclusivity periods, which occur at various times up to October 2014. Our strategy, as set out in October 2011, anticipated this potential withdrawal and we intend to offset it through reductions of related costs and a focus on generating new business.
Retail andWholesale: Funds and Investment Trusts The F&C Group offers a wide range of investment vehicles which are distributed into the retail and wholesale markets, principally through Independent Financial Advisers, discretionary wealth managers and other wholesale channels such as banks and platforms. These products comprise closed-end listed investment companies/investment trusts and both UK and offshore domiciled open ended mutual funds. Some of these vehicles are managed by F&C staff and others by teams operating through the Thames River LLPs. It is important to distinguish between these as the allocation of revenues and profits differ significantly. Where a fund is managed by a Thames River team, the revenues earned from that fund, net of the direct costs of managing the fund, and certain allocated costs, are shared between the senior investment professionals in the investment team and the Group under a predetermined profit share formula. This typically results in the senior investment professionals receiving around 50 per cent. of the relevant profits. Where a fund is managed by F&C staff, the relevant investment managers are generally remunerated by a combination of salary plus a discretionary bonus.
During 2011, the total assets managed in fund products and investment trusts declined by £1.3 billion to £12.8 billion at 31 December 2011. £1.0 billion of that reduction arose from market movements, exchange rates and investment performance. Whilst gross inflows for funds and investment trusts were some £3.2 billion, and demonstrate our ability to successfully raise new assets, gross outflows were some £3.5 billion, resulting in a net outflow of £0.3 billion. Within these flows, products managed by Thames River saw £0.4 billion net outflows partially due to generally weaker performance in their funds during the second half of the year and also due to asset allocation changes from their more wholesale focused client base.
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