04 | BUSINESS REVIEW|
Chief Executive’s Report Market Overview
The ongoing European sovereign debt crisis continued to cast a cloud of uncertainty over the global economy during 2011 as solvency fears spread beyond Greece, Ireland and Portugal to the much larger economies of Spain and Italy. Alongside this the year also saw a number of significant geopolitical developments and natural disasters which contributed to extreme volatility in global markets and poor investor sentiment. These included the earthquake, tsunami and nuclear reactor crisis in Japan, violent upheaval in the Middle East and North Africa and growing concerns over Iran’s nuclear programme.
While across the year the equity market ended only modestly down, with the FTSE 100 Index posting a total return of -2.2 per cent., volatility as measured by the VIX Index hit levels last seen at the height of the credit crisis in 2008 when the global financial system was on the brink of collapse. At its lowest point the FTSE 100 Index had declined by -13.8 per cent. from the start of the year and the S&P 500 Index of leading US companies traded in a 24 per cent. range with an average daily move of around 1 per cent.
Volatile markets, combined with poor liquidity, adversely affect the asset management industry by impacting both new business generation, particularly from retail investors, and the ability of fund managers to position client portfolios in order to deliver out-performance. During 2011 only 17 per cent. of funds in the IMA UK All Companies sector managed to outperform the FTSE All Share Index on a total return basis (source: Lipper).
Underlying asset performance was a £2.9 billion positive contributor to assets under management (AUM) over the year. However, the Group saw its AUM decline 5.4 per cent. to £100.1 billion (31 December 2010: £105.8 billion) principally as a result of net outflows and adverse foreign exchange movements associated with strategic partner assets.
Some 52 per cent. of the assets we manage are in Euro-denominated portfolios, with strategic partners making up 67 per cent. of this exposure.
Business Flows
While the business saw overall net outflows of £7.2 billion during the year, this was primarily attributable to strategic partner outflows. The outflows reflected the underlying maturity profile of some of our strategic partners’ insurance books, the market conditions in Portugal and Ireland and specific developments including the partial nationalisation of the BCP Pension Scheme in Portugal and the sale of Imperio France by Achmea. We estimate annualised revenues lost from these net outflows in 2011 to be approximately £11.9 million.
Net flows from third-party clients were flat reflecting the difficult market environment, particularly for retail and wholesale business. Institutional gross sales were strong, with £4.6 billion new mandates funded and an additional £1.2 billion won but unfunded at year end. Institutional flows were indicative of our much improved position with investment consultants where our credentials in areas such as fixed income and Liability Driven Investments (LDI) have gained strong recognition.
Financial Results
While net revenues increased to £267.0 million (2010: £243.2 million), this reflected the first full-year of Thames River’s inclusion in the Group which also had a corresponding impact on the expense base. Net revenues included performance-related management fees of £11.8 million (2010: £12.9 million). The reduction in performance fees over the previous year partially reflected weaker investment performance in the second half of the year at Thames River, where the majority of products have performance fee potential, and also the reduced performance fee potential from certain F&C mandates.
Underlying operating costs, excluding amortisation of intangible assets and exceptional items, were £202.1 million (2010: £177.0 million). These included a full-year impact from the Thames River acquisition, including £18.3 million in respect of distributions payable to Thames River members. Core operating expenses in the legacy F&C business were slightly lower year- on-year, with cost reductions more than offsetting inflationary increases.
The Group also incurred a number of exceptional and non-recurring costs which are excluded from our underlying results. These included costs associated with the F&C Partners litigation, costs of implementing our back and middle office outsourcing and one-off expenses related to our cost reduction programme. Offset against these, and also excluded from underlying results, are exceptional gains arising from the reassessment of conditional consideration payable for Thames River, and in respect of the reduction in F&C REIT put option liabilities. The Group anticipates that, based on current and forecast financial performance, no conditional consideration will be payable for the Thames River Group.
The Group achieved an underlying operating profit for 2011 of £65.2 million (2010: £67.2 million), resulting in an underlying operating margin of 24.4 per cent. (2010: 27.6 per cent.). In addition, the Group recognised investment gains, which are included in investment income, of £3.7 million during the year.
Underlying earnings per share for the year were 5.5 pence (2010: 5.7 pence).
On a statutory basis, which includes amortisation and exceptional items, the Group made a profit after tax of £2.6 million (2010: a loss of £13.4 million).
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