ANNUAL REPORT AND FINANCIAL STATEMENTS 2012 | 03


Multi-alternative division continued to experience outflows, reflecting the significant structural changes in the fund of hedge funds market.


We are encouraged by the performance of the third-party institutional business as the initiatives and structure resulting from phase 1 of our strategic review have been implemented. 2012 saw gross inflows of £2.9 billion, and withdrawals declined sharply during 2012 to £3.6 billion. Importantly, a significant portion of those assets withdrawn represented lower margin cash management and government bond mandates.


Within our consumer business, retail assets were broadly unchanged over the course of 2012. Market and economic uncertainty for much of the year dampened investors’ willingness to commit savings to risk assets, and activity within UK advisory channels slowed as advisors prepared for the implementation of RDR.


Investment trusts reported net inflows of £20 million for the year, with new share issuance by trusts offsetting share buy-backs during the year.


Strategic partner net outflows were £11.4 billion. Whilst the business mix of our strategic partners generally implies that there will be recurring net redemptions, this was exacerbated by withdrawals of approximately £1.0 billion in Portugal due to nationalisation of past service liabilities in the BCP pension scheme and £5.3 billion in the UK, as Friends Life withdrew assets to be managed by their newly formed in-house fixed income management team. We anticipate further withdrawals of fixed income assets by Friends Life of approximately £6.2 billion during H1 2013.


Results


Net revenues for the year were £243.5 million (2011: £267.0 million). Revenues from Thames River, for the reasons mentioned above, fell by £13.7 million, and strategic partner revenues declined by £7.7 million. The decline in value of the Euro vs Sterling reduced our overall revenues by approximately £6.7 million.


Net revenues include some £9.5 million of performance fees (2011: £11.8 million), with reduced performance fees at Thames River partially compensated by increases in performance fee income in the rest of the Group.


Underlying operating costs, excluding amortisation of intangible assets, foreign exchange gains and losses and exceptional items, were £172.1 million (2011: £202.1 million). Distributions to Thames River members, included in underlying operating expenses, declined from £18.3 million in 2011 to £11.6 million in 2012, reflecting the direct relationship between these expenses and the contribution from funds managed by the Thames River investment teams. Core operating expenses fell by £23.3 million, from £183.8 million in 2011 to £160.5 million in 2012. This reflects the successful implementation of the cost reduction initiatives identified in the strategic review, offset by increases in share-based payment costs arising from the increase in the Group’s share price over the


reporting period. Whilst the increase in the Group’s share price had an adverse impact on reported operating expenses, this was offset by related tax deductions included in the year’s tax credit.


The Group also incurred a number of exceptional and non-recurring costs which are excluded from underlying results. These represent costs associated with the now concluded F&C Partners litigation; costs of implementing our back and middle office outsourcing; one- off expenses of implementing our cost reduction programme; and the costs associated with the Thames River retention plan and Commutation arrangements. Offset against these is an exceptional gain from the reduction in the F&C REIT put option liability.


The Group achieved an underlying operating profit of £71.2 million for 2012 (2011: £65.2 million). After net interest expense and tax, this resulted in underlying earnings per share for the year of 7.1 pence (2011: 5.5 pence) attributable to shareholders.


On a statutory basis, which includes non-recurring and other exceptional items, the Group reported a profit after tax of £3.0 million (2011: £2.6 million).


Business review


As indicated in the introduction to this report, 2012 was a year of significant change for F&C, and represented a transitional period as a number of initiatives were implemented, which should deliver further value for shareholders in 2013 and subsequent years. Despite the significant management attention devoted to the development and implementation of strategy, the Group remained focused on the delivery of good investment performance and client service; fundamental cornerstones to retaining our existing client base and growing our business.


On an asset-weighted basis, relative investment performance remains encouraging, particularly across our fixed income capabilities, which are, for regulatory and other reasons, increasingly the core asset class for both defined benefit pension schemes and insurance portfolios. Over three years, 90 per cent of our fixed income and 50 per cent of our equity assets outperformed their benchmarks. 78 per cent of our property assets are above benchmarks over three years.


Based on this performance, we have maintained our strong position with investment consultants, achieving a slight increase in individual product buy ratings from 70 in 2011 to 74 by the end of 2012. Importantly, many of these ratings are attached to our solution- based products, such as Liability Driven Investments, equity-linked bond funds and annuity-matching funds. These products represent some of the core building blocks of our institutional growth strategy. Looking forward, we will seek to complement these liability management products with revised return-seeking products, tailored to the changing needs of defined benefit pension clients. During 2012 we made significant progress in aligning our investment function resources to these new areas of focus and we will launch related products over the course of 2013.


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