ANNUAL REPORT AND FINANCIAL STATEMENTS 2011 | 05
Statement of Financial Position
The Group closed the year with £196.9 million of shareholders’ cash reserves and net debt reduced to £77.8 million (2010: £95.9 million). A significant proportion of the shareholders’ cash reserves are held in our regulated subsidiaries against their capital requirements.
Gross debt of some £275 million (2010: £275 million) comprises £125 million of subordinated loan notes and £150 million of senior loan notes, neither of which include any financial covenants.
Business Review
While the Board conducted its review of strategy, the operational focus of the business during 2011 remained the delivery of good investment performance and client servicing during a period of market turbulence, and the project to outsource our back and middle office functions.
On an asset-weighted basis relative investment performance during the year was encouraging, particularly in fixed income, which is the core asset class for both defined benefit pension schemes and insurance portfolios. Importantly, three-year track records continue to be competitive: on an asset-weighted basis some 87 per cent. of fixed income, 64 per cent. of equities and 98 per cent. of property assets are above benchmarks over three years.
Our position with investment consultants continues to improve and we have a highly active programme of consultant engagement. We now have 70 individual product buy ratings compared to 43 at the end of 2010. This significant increase in consultant ratings primarily reflects new ratings for a number of investment solutions products launched over the last two years, including our equity-linked bond fund range and a suite of Dynamic LDI funds that we launched in December 2011. Our credentials in providing solutions to help insurers to
address their solvency requirements and pension schemes to immunise liabilities, gained important recognition with our appointment to the UK’s Pension Protection Fund’s panel of LDI providers. F&C also won the LDI Provider of the Year award at the prestigious 2011 European Pensions Awards.
As disclosed in our Interim Report, a further notable achievement during the year was our appointment by the National Employment Savings Trust (NEST) to manage their ethical fund option. NEST is a new workplace defined contribution pension scheme, into which UK employees who do not currently have access to an occupational pension scheme will gradually be auto- enrolled by 2017. This mandate provides long-term potential for business flows and further recognition of F&C’s scale and leadership in sustainable investing. We see further opportunities for developing our presence in socially responsible investment arising from recent decisions by some other asset managers to scale back their resources and activities in this area.
The tough market environment for the retail/wholesale mutual fund business resulted in 2011 being a relatively subdued year for new product innovation across the industry. We closed a small number of funds and share classes which were sub-scale and where we saw little demand. In the UK, we continued to focus heavily on multi-manager products, including our Lifestyle risk-rated funds, where we are seeing support from Independent Financial Advisers (IFAs) seeking an outsourced core investment proposition for their clients. We have also been planning for the implementation of the recommendations of the Retail Distribution Review, which will replace the traditional commission-based IFA model with the explicit charging of fees for advice. The new regime will be fully implemented by the end of 2012 and therefore we are in the process of finalising our new fund pricing strategy.
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 pension 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 AUM for strategic partners were £60.2 billion (2010: £67.0 billion) representing 60 per cent. of our total AUM. 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 revenues.
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.
As disclosed in our Interim Report, the agreement to outsource certain back and middle office functions to State Street came into effect on 1 July with all impacted staff now transferred to State Street. The project has been managed successfully, with minimal disruption to client servicing. As we complete our move to State Street’s strategic platform over the course of 2012, we expect to deliver the cost savings associated with this project.
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