ANNUAL REPORT AND FINANCIAL STATEMENTS 2012 | 15
Our financial performance
Total return We view share price total return (including dividends) as a key performancemeasure. Our total shareholder return for the year ended 31 December 2012 was 62.5 per cent. In the same period, the total shareholder return on the FTSE 250 Index was 26.1 per cent and the FTSE 100 Index was 10 per cent.
Market backdrop Our financial results have three key sensitivities to external factors; equitymarket levels, fixed incomemarket levels and the Euro/Sterling exchange rate. Equitymarket levels and fixed incomemarket levels impact our assets undermanagement, and consequently our revenues; at the end of 2012 approximately 59 per cent of our assets were invested in fixed income securities, and a further 27 per cent in equities. In 2012 we earned approximately 41 per cent of our revenues in Euros, primarily in respect of assetsmanaged by our Dutch and Portugese subsidiaries and our reported revenues are impacted by the exchange rates used to translate these amounts to Sterling. Depending on the nature of our products andmandates, revenues may be determined by reference to daily,monthly or quarterly assets undermanagement.
Equitymarkets were volatile during 2012; the FTSE 100 opened at 5572; it subsequently reached a low of 5260 on 1 June 2012 before recovering to close the year at 5898. The average FTSE 100 level over 2012 was 5743. Fixed incomemarkets continued to performstrongly during 2012, as investors continued to favour low risk assets formost of the year. For example, the Barclays EuroAggregate Index, a broad fixed income index, opened the year at 147.8 and closed the year at 159.5, posting a positive return of some 8 per cent.
The Euro/Sterling exchange rate opened the year at 1.20, before strengthening to 1.28 in quarter 3 of 2012; the year-end rate was 1.23 and the average for 2012 was approximately 1.23.
Presentation of financial results International Financial Reporting Standards (IFRS) require our Financial Statements to consolidate the results of our Managed Pension Funds (MPF) business on a line-by-line basis, impacting the presentation of both our Income Statement and Statement of Financial Position. Our MPF business provides certain clients with asset management services inside an insurance product wrapper. The requirement to consolidate this business has a significant effect on the financial investments and investment contract liabilities captions included in our Statement of Financial Position, the risks and rewards of which are substantially borne by the clients of this business. In addition, our Statement of Financial Position includes some £4.5 million of cash also attributable to policyholders of this business and which is not available for corporate purposes. As MPF is not an area of strategic focus for the Group and has recorded net client redemptions in recent years, a project is underway to terminate this business and all clients have been offered the opportunity to transfer to alternative F&C funds. As a consequence, the financial investments and investment contract liabilities associated with MPF have reduced substantially during 2012 and we anticipate that the remaining amounts will be redeemed in H1 2013.
Net revenue Net revenue for the year was £243.5million (2011: £267.0million). This included £9.5million (2011: £11.8million) of performance fee income. Performance fee income was earned froma variety of fund and client types, with themost significant contributor being F&C REIT, our property business, where investment performance has remained strong throughout 2012.
Strategic partner revenues declined by some £7.7million during the year, whilst consumer and institutional revenues fell by some £18.0million, with some £14.4million of that decline attributable to wholesale funds.
Our strategic partners remain an important part of our client base, however, we believe our strongest growth opportunities lie in our consumer and institutional business – for both third-party institutional business and in the retail and wholesale channels.While £4.5 billion of gross new third-party business was funded during 2012, outflows of £6.4 billion resulted in net outflows of £1.9 billion. Some £1.2 billion of these net outflows arose in our wholesale business, which comprises certain of the legacy Thames River funds.Whilst these funds carry a net fee margin substantially higher than the majority of our business, their impact on Group profitability is significantly less, as a result of the relationship between fee income and distributions to members of the Thames River LLPs. Our third- party institutional business recorded net outflows of £0.7 billion during 2012; however, as a result of the differential between lower fee margin outflows and higher fee margin inflows, these net flows will contribute a small increase in annualised revenues.
As they are indicative of the growth potential of the business and a measure of the successful implementation of our stratetgy, consumer and institutional funds flows and associated annualised revenues represent a key performance indicator (KPI) used by the Board and management to assess the progress of the business.
Revenuemargin Our revenuemargin excluding performance fees,measured as our net management fee income divided by average assets under management, reduced from24.4 basis points in 2011 to 23.9 basis points in 2012. This decline principally arises fromthe reduction in wholesale funds, which carry a feemargin approximately 75 basis points greater than the Group average.
Operating expenses The Group’s underlying operating expenses, excluding foreign exchange gains and losses, amortisation of intangible assets and exceptional items, were £172.1million in 2012, a reduction of some £30.0million, or 15 per cent, over prior year levels. This reduction is attributable to twomain factors. Firstly, core operating expenses reduced from£183.8million to £160.5million, a reduction of £23.3million. This reduction reflects the implementation of the actions outlined in the Group’s strategic review and we anticipate that the remaining savings identified in that review will be delivered in line with the timetable previously set out. Secondly, distributions to the individualmembers of the Thames River limited partnerships fell from £18.3million to £11.6million, primarily reflecting the reduced level of income fromthe wholesale fundsmanaged by the Thames River
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