ANNUAL REPORT AND FINANCIAL STATEMENTS 2012 | 13
Our trading performance and outlook
Introduction F&C provides asset management services to two main client groupings, which we classify as strategic partners and consumer and institutional clients. Our proposition for consumer and institutional investors comprises a wide range of investment products and funds, sold to third-party retail, wholesale and institutional clients.
Strategic partners primarily comprise a small group of insurance clients for whom we have managed assets under longer-term contractual arrangements. These contracts have generally provided us with certain exclusivity rights in relation to the management of the assets associated with each partner. The assets managed for each of these clients are generally much greater than our average relationship size.
Our strategic partner focus is on the retention of current relationships and capture of related asset flows, through a combination of strong relationship management, investment performance and client service.
The consumer and institutional area provides us with much greater scope for revenue and asset growth, through a variety of products and channels, and our sales and marketing efforts are heavily biased towards this area of business.
Strategic Partner business Our strategic partners comprise: Achmea (The Netherlands), Millennium BCP (Portugal), Friends First (Ireland) and Friends Life (UK). The assets managed for these entities principally comprise insurance funds but also include certain sub-advised mutual funds and pension scheme assets. These are long-standing relationships which generally provide 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 the exclusivity period has already come to an end, although we continue to manage all the related assets. The current Achmea exclusivity relationship and related contract matures in October 2013 and the current Friends Life contract matures in October 2014.
We provide strategic partners with portfolio management in multi-asset and single-asset class mandates and a range of investment solutions, such as liability hedging strategies and shareholder engagement programmes.
At 31 December 2012 assets under management for strategic partners were £58.5 billion (2011: £63.7 billion) representing 61 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 33 per cent of 2012 net revenues.
Partially due to the maturity profile of some of the underlying insurance products of our strategic partners, there has been a long- standing trend of annual net outflows. In 2012 net outflows from strategic partners were £11.4 billion (2011: £7.2 billion). 2012 strategic partner outflows were exacerbated by previously notified outflows of £1.0 billion of Millenium BCP pension scheme assets due to the partial nationalisation of the Portugese banking pension system and withdrawals of £5.3 billion of fixed income assets by Friends Life. As disclosed in previous reports, Friends Life has established an in-house fixed income asset management function, and has repatriated certain assets to this business. We anticipate that a further £6.2 billion of fixed income assets will be transferred to Friends Life during 2013; after this transfer we will manage approximately £15.7 billion of Friends Life assets, including £2.4 billion of remaining fixed income assets.
Whilst the Achmea long-term contract matures in October 2013, we do not yet have clarity on asset withdrawals that may result from this and we anticipate dialogue with Achmea regarding their future asset management arrangements during H1 2013. At 31 December 2012, we managed approximately £22.7 billion on behalf of Achmea.
Consumer and institutional F&C is a leading provider of services to third-party investors, which we broadly categorise as either third-party institutional business, or consumer business, which comprise open-end retail funds and investment trusts.
Our third-party institutional business includes a range of solutions- led products, principally aimed at assisting clients immunise their liabilities, together with a range of return-seeking products across asset classes – equity, property, fixed income and Multi-asset. Our largest institutional client base is defined benefit pension schemes and our largest markets for third-party institutional business are The Netherlands, the UK and Germany. Institutional assets under management were £24.4 billion at 31 December 2012 (2011: £23.3 billion) representing 26 per cent of our total assets under management and some 28 per cent of 2012 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 74 individual product buy ratings at the end of 2012. During 2012, our institutional business recorded net outflows of £0.7 billion; while we generated gross inflows of £2.9 billion, these were more than offset by gross outflows of £3.6 billion. However, pleasingly, our inflows were biased towards areas of strategic importance for the Group, whilst outflows were generally of lower fee margin, legacy business. Additionally, at 31 December 2012 the Group had a further pipeline of institutional new business that had been won, but had not yet
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