Annual Financial Report

25 September 2017

River and Mercantile Group PLC

Year-End Preliminary Results Announcement

Year ended 30 June 2017

River and Mercantile Group PLC ("the Group"), the advisory and investment solutions business, today releases its unaudited preliminary results and management report for the year ended 30 June 2017.

Highlights for the year ended 30 June 2017

· Fee-earning AUM/NUM increased by 22% year on year, to £31.0bn;

· Net flows for the year were £3.8bn;

· Investment performance increased AUM by £1.7bn;

· Net management and advisory fees increased by 22% year on year to £55.9m;

· Performance fees were £12.5m, compared to £1.5m in the prior year. This reflects strong investment performance and more stable fixed income yields;

· Statutory net profit after tax was £13.4m, compared to £5.9m in the prior year;

· Statutory basic earnings per share were 16.45 pence per share, compared to 7.15 pence per share in the prior year;

· Adjusted underlying profit before tax1 was £16.4m, compared to £11.1m in the prior year;

· Adjusted profit after tax2 was £18.6m, compared to £9.5m in the prior year;

· Adjusted basic earnings per share3 was 22.90 pence per share, compared to 11.62 pence per share in the prior year;

· The Board of Directors have declared a second interim dividend of 8.1p per share, of which 2.8p is a special dividend and relates to net performance fees. The dividend will be paid on 3 November 2017 to shareholders on the register as at 13 October 2017. The ex-dividend date is 12 October 2017;

· The Board of Directors have proposed a final dividend for the year ended 30 June 2017 of 6.0p per share, of which 2.8p is a special dividend and relates to net performance fees. The dividend will be paid on 15 December 2017 to shareholders on the register as at 24 November 2017, subject to approval by shareholders at the Group's AGM. The ex-dividend date is 23 November 2017;

· The total dividends paid, declared and proposed are 19.7p per share, representing 80% of the adjusted underlying profit after tax and 100% of the net performance fee profit after tax.

Peter Warry, Acting Chairman said:

"Despite a period of unprecedented global change and uncertainty, the year ended 30 June 2017 has been a successful year for the Group, with our strongest set of results to date.

We have seen strong positive flows in all divisions, continuing our track record of 13 consecutive quarters of positive net flows. This combined with strong investment performance has led to a significant increase in AUM/NUM and similarly high levels of growth in net management fees.

This year has also seen us continue to use our scalable operating platform to grow our profit margins, which combined with a continuation of our high dividend payout ratios has led to increased dividends. In addition to the 5.6p already paid, I am pleased to announce that we are declaring a second interim dividend of 8.1p and proposing a final dividend of 6.0p, both dividends containing 2.8p which relates to net performance fees. These will be paid to shareholders on 3 November and 15 December 2017 respectively and take total dividends proposed and declared for 2017 to 19.7p, which is 86% of adjusted profit after tax."

Mike Faulkner, Chief Executive Officer said:

"The Group's 2017 results, our best ever, show continued progress towards our stated growth aspirations. We remain true to the central idea of understanding our clients' problems and needs, and using our investment skills to solve them. This principle has allowed us to grow strongly in the three years since IPO, in a way that has been consistent with the strategy we set out at the time.

As a business we are now far stronger in every way - depth of people, scale and skills, and breadth of clients - and as a result we have refreshed our strategy to reflect this. Our ambition for growth continues, but we will remain focused on our central idea, just applied to a broader range of markets, and with an emphasis on delivering returns."

Notes

1 Adjusted underlying profit represents net management and advisory fees less associated remuneration, recurring administrative expenses (excluding IT transition costs), depreciation, and finance income and expense.

2 Adjusted profit comprises adjusted underlying profit, plus performance fees net of associated remuneration and the gain on disposal of the DAA fund seed position.

3 Adjusted basic earnings per share represents adjusted profit after tax divided by the weighted average number of shares outstanding in the period.

The financial information set out in this annual results release does not constitute the Group's statutory accounts for the year ended 30 June 2017 or 2016. Statutory accounts for the year ended 30 June 2016 have been delivered to the Registrar of Companies. The auditor's report on those accounts was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

The financial information for the year-ended 30 June 2017 is unaudited. The statutory accounts for the year ended 30 June 2017 will be delivered to the Registrar following the Group's annual general meeting.

The 2017 Annual Report and Accounts will be published in October 2017 and a copy will be posted on the Group's website.

This RNS has been approved on behalf of the Board.

Peter Warry - Acting Chairman, 25 September 2017

Electronic copy

A PDF version of this announcement is available through the link on RNS, and from the Group's website http://riverandmercantile.com/Asp/uploadedFiles/file/Investor_relations/RandM_Preliminary_Results_2017.pdf

For further information please contact:

River & Mercantile Group PLC +44 (0)20 3327 5100

Kevin Hayes, Chief Financial Officer

MHP Communications

Tim Rowntree / Giles Robinson +44 (0)20 3128 8100

Forward Looking Statements

This announcement contains forward looking statements with respect to the financial conditions, results and business of the Group. By their nature forward looking statements relate to events and circumstances that could occur in the future and therefore involve the risk and uncertainty that the Group's actual results may differ materially from the results expressed or implied in the forward looking statements. Nothing in this announcement should be construed as a profit forecast.

River and Mercantile Group PLC

Unaudited preliminary results and management report 2017

Contents

Chairman's statement

Chief Executive's review

Investment performance

Financial review

Consolidated income statement

Consolidated statement of financial position

Consolidated statement of cash flows

Consolidated statement of changes in shareholders' equity

Notes to the consolidated financial statements

Company statement of financial position

Company statement of cash flows

Company statement of changes in shareholders' equity

Notes to the Company financial statements

Other information

Chairman's statement

A year of strong growth in many areas

Dear Shareholder,

I am pleased to report that despite a period of unprecedented global change and uncertainty, the year ended 30 June 2017 has been a successful one for the Group, with our strongest set of results to date.

We have seen strong positive flows in all divisions, continuing our track record of 13 consecutive quarters of positive net flows. This, combined with strong investment performance has led to a significant increase in AUM/NUM and similarly high levels of growth in net management fees.

In June, we welcomed the Emerging Markets ILC team from Credit Suisse in the US. They bring important additional capability to the Group which we hope will further enhance our performance and we look forward to working together.

The Group prides itself on its outcome-oriented approach, where we concern ourselves primarily with the needs of our clients and how single products or combinations of products can help solve these needs. We aim to ensure that our clients understand the role that our solutions play in their broader objectives. This not only continues to benefit our clients, but also contributes to our low levels of attrition alongside our positive client feedback.

This low attrition, combined with the diversified nature of the divisions within the Group, gives rise to a more stable revenue base over time compared to many in our industry.

From a regulatory perspective, the rate of change in our market has been fierce, with no sign of it slowing in the coming months. The landscape is being shaped by MiFID II and the Senior Managers and Certification Regime amongst others, not to mention the FCA's Asset Management Market Study, which reported in June and has been followed by a reference to the Competition and Markets Authority. We welcome the FCA's findings, and the remedies aimed at improving transparency and improved outcomes for investors.

2017 has seen our highest level of performance fees since our IPO in 2014. We had given guidance that our Fiduciary Management performance fees would be depressed in times of falling interest rates as seen in 2015 and 2016, and it is pleasing to see that they have risen once the rate headwinds have eased. Our view that rates will remain low for longer remains unchanged.

This year has also seen us continue to use our scalable operating platform to grow our profit margins, which combined with a continuation of our high dividend payout ratios has led to increased dividends. In addition to the 5.6p already paid, I am pleased to announce that we are declaring a second interim dividend of 8.1p and proposing a final dividend of 6.0p, both dividends containing 2.8p which relates to net performance fees. These will be paid to shareholders on 3 November and 15 December 2017 respectively and take total dividends proposed and declared for 2017 to 19.7p, which is 86% of adjusted profit after tax.

June 2017 marked three years since our IPO and admission to the premium section of the London Stock Exchange. We feel that our revenue growth, margin expansion and dividend levels are important proof-points against the statements we made at the IPO three years ago and we now turn our attention to continuing the strong results for the next three years.

I write this report as Acting Chairman, following the sad death of Paul Bradshaw earlier this year. He was an asset to the business and is sorely missed. I would, however, like to take this opportunity to welcome Jonathan Dawson, our incoming Chairman who will pick up the baton from 1 October. He brings a wealth of experience to the role which I am confident will prove invaluable to the Group as it navigates its next three years as a PLC.

Peter Warry

Acting Chairman

Chief Executive's review

This Report marks three years since we brought River and Mercantile to the public markets. While a single year can be a short period of time over which to evaluate a strategy, three years can give a much greater perspective. I therefore want to focus my statement on this by:

· Re-visiting what we are trying to do as a firm;

· Looking at how we have performed in the last three years including returns to shareholders, particularly in light of our stated aims set out in my 2014 statement; and

· Describing our future strategy.

What we are trying to do as a Group

Our purpose is simple - to identify our clients' actual financial problems and needs, and solve them as effectively as possible. The Group's outcome orientated approach, which focuses on tailoring solutions using our various skillsets in order to achieve client outcomes, has conduct at its core. This involves us doing two things well:

· Understanding our clients in great depth - in order that we can define their need in the right level of detail so that we can solve it fully. This involves us understanding clearly the environment within which they operate. For example, how defined benefit funding works, or the influence of Solvency II on insurance clients, are important to understand if we are to appreciate properly the investment need; and

· Developing and maintaining very strong investment skills - that can be deployed in various ways to solve these investment problems.

Obviously, these are supported by infrastructure and a broader control environment, but these two activities really define the essence of who we are. Our contention is that this is good for clients, shareholders and employees simultaneously. It makes it more likely that clients will have their needs met and therefore that we will add value for them. Firstly, because if our clients are experiencing value, they are more likely to remain with the firm, which in turn produces high quality earnings for shareholders. Secondly, because we operate in a wide range of environments, we get to work on a wide variety of interesting and challenging problems, which improves staff retention and is better in the long-run for clients.

This simultaneous win for our three key stakeholder groups is critical to our model and is the reason we don't deviate from the idea.

Critically, we do tend to stick to problems that are relatively hard to solve, and that therefore require a relatively high level of intellectual content. There are two reasons for this. First, culturally we prefer the challenge of things that are hard to do. Second, it tends to mean we will be less subject to competitive pressures than if we were offering something that is inherently commodity-like in nature.

This approach to working with clients has also driven the initiatives on which we are focusing in the coming years. 

How we performed over the last three years

The table below shows some key metrics illustrating how the business has performed in the last three years.

*2016 revenues were impacted by the closure of the global thematic equity team and the disposal of part of the US business, Palisades.

The table shows a number of important elements. We have succeeded in growing net management and advisory fees at around 12% per annum. This is around the minimum level of medium term growth we tend to expect across the business, and is lower because we have had to close two activities during the three year period that were revenue generative (our global thematic equities business and our US pensions transaction business Palisades). Prospectively, we expect our growth rate to be in excess of this level.

Our adjusted underlying profit margin has widened from 22% to 29% over the three years. On the basis of revenue growth, this implies our underlying profit growth is 86% over the three year period, or 23% per annum.

Our regretted institutional attrition rate has been relatively low during the period, and is a function of our client outcome-led approach to engaging, as I described earlier. As a result, our AUM/NUM growth has been strong. This, coupled with investment performance, has led AUM/NUM growth in the three years to be 21% per annum. This has outpaced revenue, partly because we have seen a small amount of margin contraction (mainly a mix-of-business effect), but mostly because advisory fees have been relatively flat over the three year period.

But how does this growth achieved compare with our strategy? In our 2014 Report, I made a series of statements about our strategic intent. The table below lists them, what happened, and identifies whether we achieved the objective or not.

The table shows that we have performed strongly on five measures, and underperformed on one. In general, assuming we all accept that strategies are rarely delivered perfectly (or else they are unlikely to be sufficiently ambitious!) the business has performed well - we have grown significantly and done it consistently with our intent.

Underlying this is our investment platform, which has delivered strong performance across all of our service offerings. I believe it is rare for any investment firm to have this consistency across product offerings, and that is testament to both the quality of our people and the focus of the business on those things we are confident we can do well.

The table immediately after this report shows the investment performance we have achieved across our various strategies and the key thing I would draw out from this analysis is this is not a statement of the percentage of strategies outperforming - such an objective can be achieved by everything outperforming by 0.1% per annum, which is of relatively little value to a client. Rather, our strategies aim to add meaningful value for clients, in a way that makes a significant difference to their circumstances. All of our solutions are ahead of their benchmark since inception.

It is this consistency that led to FundCalibre ranking our Equity Solutions division top for relative outperformance across our range of products over a five year period. The award was well deserved as it reflects the strength of the PVT investment process, and this consistency is reflected across the whole firm.

Returns to shareholders over recent years

Notwithstanding that markets can, from time to time, value different things other than financials, our returns to shareholders have to date been relatively strong, both in absolute terms and compared to our sector.

Group share price and TSR since IPO vs financial services

http://www.rns-pdf.londonstockexchange.com/rns/6353R_-2017-9-23.pdf 

In truth though, we do not pay substantial attention to the performance of our sector. Rather, we are focused on the delivery of strong absolute economic returns to shareholders.

Nonetheless, I think that in one respect we need to communicate our story better. As I showed earlier, our attrition rate is very low compared to peers within our industry (a number of our competitors have stopped disclosing the components of client flows, showing only net flows). Our client base is very diversified, as is our revenue exposure by asset class, which we are disclosing regularly in our Revenue-weighted asset attribution (RWAA).

Our RWAA is shown in the Financial Review which appears later in this document. The point we are making in disclosing this information on attrition and diversification is that the quality of our revenue is very strong and stable, much more so than most traditional asset management firms (that is not a criticism of those firms - just an observation of the difference between our business models).

I am not yet convinced that these factors are reflected in our valuation, so we will continue to communicate this differentiation to investors.

Our strategy for the next three to five years

During the last three years, we have significantly developed the depth of our resources and our effectiveness in operating in different distribution channels. Immediately following the IPO, there were channels we aspired to access - specifically the consultant channel. These have been established and we have effective client relationships in these areas. This gives us strategic options that we did not have three years ago and therefore it is right that we refresh our strategy.

I am a great believer in the idea that strategy is "the evolution of a central idea through changing circumstances".

Our central idea is this concept of understanding client needs, and solving them well, where we are focused on solving difficult problems. I believe this strength is a competitive advantage in our industry and we work hard for it to remain so.

For the next three to five years, the emphasis in selecting "difficult" problems will be towards the generation of return, rather than other types of difficulty. Markets seek what they don't have, and markets value growth most highly in those that have it when growth is more generally not present. Similarly, one of the challenges in our industry is that the price of risk management in a wide range of investment products has been very low levels of return. I addressed this in my statement last year, and it remains central to our strategy. I believe investors will observe, progressively, that if the price of risk management is no return, then that price is too high and they will look for alternative solutions.

Therefore, the selection of strategies we offer to meet particular needs will tend to have the characteristics of being significant-return focused, and delivering this return in a way that is consistent with a particular desirable outcome. The strategies and their desired outcomes will be dependent on the channel desiring them. We currently operate in seven channels as shown in the table below.

We believe there is opportunity to widen the range of strategies offered through each channel, as well as adding to the channels.

Importantly, we have significant capacity to grow. Shown in the table below is our remaining capacity to take on assets in our existing asset management strategies, along with estimated total management fees when capacity is reached (ignoring performance fees, advisory fees and new products). This shows clearly that we still have very significant room to grow our business through the above channels.

1. Revenue is estimated by taking margin ranges multiplied by estimated capacity.

The above tables identify our specific focus to grow the current business, and that we have very significant capacity to grow the business if we are successful.

Given we have developed the number of channels through which we operate, and have significant remaining capacity to support growth in these channels, it makes sense to refresh our strategic objectives for the next three to five years. I therefore codify these growth objectives into the following measurable statements, against which I will report on progress in subsequent statements:

· We intend to grow our net management and advisory revenue, organically, at a minimum of 12% per annum;

· We may make acquisitions to grow faster, but only if it takes us faster in the above direction and in a way consistent with our central idea;

· We will aim to increase returns to shareholders through performance fees;

· We will aim to grow the smaller channels faster, in order to be significantly more diversified by channel in the next three to five years;

· We will launch Global Macro, International (ex US) equity and international (ex US) smaller companies products, along with other products, to support this growth strategy;

· We will aim to focus growth by channel, in the first instance, on those products and services identified in the above table; and

· We will continue to grow our underlying operating margins to 30%-35% over the medium term, by growing remuneration and admin expenses at a lower rate than net management and advisory fees.

With this in mind, I would re-emphasise our central idea - I would expect us in the coming years to launch products that are not on the above list, that emerge as a result of client need-led demand. We will certainly add investment capability we do not currently already have in-house, should the right individual or team become available. For example, we would very much like to add capabilities in credit and private markets, should the right opportunities come along. If they do not, we will not add them for the sake of it.

Summary

We remain true to our central idea of understanding our clients' problems and needs, and using our investment skills to solve them. This principle has allowed us to grow strongly in the three years since IPO, in a way that has been consistent with the strategy we set out at the time.

As a business we are now far stronger in every way - depth of people, scale and skills, and breadth of clients - and as a result we have refreshed our strategy to reflect this. Our ambition for growth continues, but we will remain focused on our central idea, just applied to a broader range of markets, and with an emphasis on delivering returns.

Finally, on behalf of everyone in the company, I would like to thank all of you for your continued support - we are grateful for it.

Mike Faulkner

Chief Executive Officer

Investment performance

* Composite performance

Financial review

Strong improvements across the business

· Fee earning AUM/NUM increased by 22%

· Positive net flows in every quarter since IPO - total net flows for the year of £3.8bn

· Positive investment performance of £1.7bn

· Regretted institutional attrition of 3%

· Net management and advisory fees up 22%

· Growth in adjusted underlying margin to 29%

· Adjusted EPS growth of 97%, dividend growth of 107%

· Total shareholder return since IPO of 26.1%

Key Performance Indicators

AUM/NUM and margins

The growth of our net management fee revenue results from the growth of our assets and notional under management and the stability of our management fee margins charged to clients.

Positive net flows are an indication of both our ability to retain previously won assets; and our ability to win new mandates and increase allocations from existing client mandates.

The following table shows the AUM/NUM for the year ended 30 June 2017.

* Includes £141m relating to the DAA Fund.

Total sales for the year increased by 16% to £5.1bn. Of these sales, £1.7bn were from new client mandates and £3.4bn were increased allocations and new mandates from existing clients. The ability to grow through our existing clients is an indication of positive client satisfaction through delivering against outcomes and gives the business an overall lower cost of client engagement.

Investment performance added £1.7bn to AUM. Within Fiduciary Management, 33% of the performance was generated from the bond-based matching fund and 67% from the risk assets.

Overall margins have remained stable reflecting slight reductions in individual businesses, offset by an increase in higher margin strategies. Our medium term management fee margin guidance reflects increasing client mandate sizes and anticipated mix effects.

Regretted institutional attrition (RIA)

Our business model is focused on clients' needs and desired investment outcomes, rather than a product-led approach to engagement. This approach results in higher client satisfaction and therefore low redemption rates. We measure this by RIA.

RIA is the opening fee earning AUM/NUM of lost institutional clients, divided by total opening fee earning AUM/NUM. It excludes pension clients which have entered the Pension Protection Fund due to the sponsors default or pensions who have moved to buy-in or buy-out, and redemptions arising for operational cash flows such as fund benefit payments.

RIA is not directly measured for Equity Solutions - Wholesale as investor redemption decisions tend to be driven by their asset allocation and investment performance outcomes. We closely monitor these outcomes in particular investment performance against benchmarks to determine whether the causes for wholesale attrition are negative client outcomes.

This year saw an increase in Equity Solutions - Institutional as the result of a single mandate which was redeemed following a change in investment allocation decision. The overall level remains low, emphasising the stability of the Group's client base.

Revenue

Net management fees

Management fees are generally charged as a percentage of the AUM/NUM we manage for the clients and are negotiated with clients based on a number of factors including the size of mandate. Net management fees reflect rebates and other payments to external distributors.

This year, we have seen strong growth in net management fees, with an increase of 23%. This is an excellent result, reflecting the strong growth in AUM/NUM at stable management fee margins.

Fiduciary Management

Fiduciary Management has once again enjoyed a successful year, with particularly strong investment performance in the early part of the year, which follows its success last year during the market reaction to Brexit. While the resulting growth in AUM in June last year had minimal impact on revenue in 2016, it had a full year impact this year.

Multi Asset Solutions

During the year, the Dynamic Asset Allocation (DAA) Fund has continued to attract investors and at year-end its AUM was £141m (2016: £64m). As the fund has a three year track record and has reached a sustainable level of AUM, the Group redeemed its £5m seed capital position, realising a gain of £0.8m. The DAA Fund uses the same investment processes as TIGS in Fiduciary Management. Its launch and seeding in 2015 was a strategic priority to give access to the TIGS investment strategy in daily dealing fund format to a broader range of investors, both wholesale and institutional.

Derivative Solutions

Derivative Solutions comprises Liability Driven Investing (LDI including gilt collateral management) and structured equity products.

Derivatives by type:

Derivatives' structured equity capabilities provide strategies to shape the return profile of clients' equity portfolios.

The majority of structured equity redemptions during the year - and in transition at the year-end - relate to clients repositioning their exposures, due to equity market performance or changes in the underlying asset portfolios.

LDI relates to the management of interest rate and inflation risk in the underlying pension liabilities. We continued to see strong flows from existing clients who increased their level of hedging to respond to market and scheme funding levels. These hedges generally increase in value as interest rates fall, helping to defend clients from increases in their liabilities.

As structured equity products are usually sold at a lower margin than LDI, the average margins of the Derivative Solutions division will fall over time if structured equity continues to sell strongly, due to mix-shift effects.

Equity Solutions - Wholesale and Institutional

The Equity Solutions division provides long-only equity funds and strategies to institutional clients and wholesale intermediaries. Institutional clients can access the strategies through funds or segregated mandates. The funds are available to wholesale intermediaries who distribute to their retail clients.

2017 has been a strong year for the Equity Solutions division and its PVT (Potential, Valuation and Timing) investment team with strong sales and investment performance driving AUM above £3.6bn.

The successful globalisation of the PVT process has continued, with mandate wins in the UK, US, Australia and New Zealand. Other significant wins include the £200m mandate from Alliance Trust.

In an environment of increasing client focus on value-for-money, demonstrating strong and sustained investment performance is key to demonstrating positive client outcomes. Across the entire Equity Solutions fund range the inception-to-date investment performance is above benchmark. This was recently recognised when the division was named as the top performing manager in the FundCalibre Fund Management Equity Index 2017, with 5 year average outperformance of greater than 50% above the comparable peer group. The performance of the individual funds can be seen in the investment performance table.

With the exception of the UK Smaller Companies Fund and the UK Micro Cap Investment Company all strategies have significant additional capacity. The pipeline remains strong from institutional clients. Retail markets have been buoyant during the year, with strong wholesale flows, however we remain cautious on the outlook for equity markets in 2018.

In June 2017, we signed a heads of terms and sub-IAA with Credit Suisse Asset Management (CSAM) whereby an emerging market equity investment team (the ILC team), who managed $352m of assets, transferred to the Group. These strategies are being managed under an investment advisory agreement with CSAM until the Luxembourg registered UCITS funds are transferred to the Group, which is anticipated to occur in the first half of the 2018 financial year. The addition of the ILC team, who have a similar life cycle investment philosophy to the PVT Team, expands our equity solutions expertise into emerging market equities. The assets will be shown in AUM once the underlying funds are transferred to the Group under an IMA.

Advisory revenues

The Solutions division earns revenues from clients who engage us on a retained fee basis or from specific projects. This year has seen an 18% increase in advisory revenues driven by increased project fees.

Part of this is due to the market environment, with events like Brexit and other change generating more project work over the year. The strong equity market returns (and improving funding levels) resulted in more client activity, particularly in introducing more downside protection to equity mandates and other de-risking strategies.

Revenue-weighted asset attribution

The revenues of traditional asset management firms have a high correlation to equity markets. However, the relative diversification of the Group's revenue streams compared to many of our peers mean they display greater stability and resilience to negative equity market movements.

Revenue-weighted asset attribution (RWAA) classifies our management and advisory revenues by the respective driver of the revenue. Management fees from Equity Solutions and Fiduciary Management that relate to equity allocations are classified as having an equity market driver. Likewise, the components of Fiduciary Management that relate to bond and interest rate allocations are classified as having an interest rate driver. Advisory revenues are not market sensitive and therefore are classified as being "independent".

In Derivative Solutions, while the underlying revenue is generated on hedging strategies in interest rates, inflation and equities, the revenue is not linked to the mark-to-market valuation but to the contractual notional amount of the derivative instrument. As a result, these revenues are also considered independent or cash-like in their characteristics

http://www.rns-pdf.londonstockexchange.com/rns/6353R_1-2017-9-23.pdf 

We believe this shows that the Group is well diversified in its revenue base, with over 50% of revenue derived from sources which will not decrease as a direct result of an equity market downturn. This is not to say that a prolonged downturn would not have an impact on our business over time, but our revenues should show lower volatility than other traditional asset managers.

Within Equity Solutions, while the underlying revenue is related to equity market performance we have a range of strategies that play to different parts of the equity market cycle which forms part of our investment philosophy and process. The income strategies play to the stability of large cap quality companies; the smaller company and micro-cap strategies plays to growth cycle; the recovery funds, both UK and World, play to a recovery cycle after a market correction; and the globalisation of the PVT process and the addition of the emerging market team allows us to offer strategies linked to different geographic regions.

RWAA measures a differentiating attribute of our business which is a source of competitive advantage. The cross-cycle stability of our revenue base and therefore our net economics allows us to take a longer term view in hiring, retaining and developing our staff. This gives us a consistency of client engagement and allows us to build long term trusted relationships with our clients so that we understand their expected outcomes.

Performance fee revenue

This year has seen a significant increase in performance fees as a result of the strong underlying performance generated by the investment teams, coupled with the more stable interest rate environment in the case of Fiduciary Management.

Fiduciary Management

Investment performance in TIGS (the main investment strategy within Fiduciary Management) above a benchmark generates performance fees for some clients. During the year, TIGS generated 14% performance including liability hedging.

As we have previously guided, in a stable to rising interest rate environment we would expect to earn higher performance fees from Fiduciary Management. During the year interest rates were more stable. This rate environment combined with the investment performance from assets in the risk portfolios generated investment performance of £0.9bn for clients which resulted in gross performance fees of £6.6m.

The majority of the performance fees in TIGS are subject to a deferral mechanism whereby performance fees are recorded one third in the year the investment performance occurs, and two thirds deferred and spread over two further years. If the performance hurdle is exceeded on an annual basis, the next third of the deferred fees becomes payable in each of the subsequent years. Underperformance in the deferral period is required to be made up in subsequent periods before performance fees can be earned. In the event that the client redeems its investment, deferred fees become immediately payable.

Performance fees are recorded on the anniversary dates of each mandate, which fall throughout the year.

In the year ended 30 June 2017, of the £6.6m of performance fees earned, £0.2m were from previously deferred performance fees.

In the last two years, TIGS has strongly outperformed its performance hurdles. As a result there are a number of clients who, if performance continues, will crystallise performance fees where previously they did not.

The table below shows the level of performance fees the Group would crystallise at different outperformance levels. It is based upon the following assumptions

1) Outperformance is consistent each year;

2) The current performance fee eligible AUM is as at 30 June 2017 without change over the period; and

3) The 30 June 2017 performance level is the starting point.

Equity Solutions

In Equity Solutions, performance fees are earned on outperformance relative to a stated benchmark. The majority of performance fees are realised based on a calendar year performance period, with the exception of the River and Mercantile UK Microcap Investment Company Limited ("RMMIC"). The RMMIC is structured as a closed-ended vehicle. If the net asset value rises above a prescribed value, the independent board of directors of the RMMIC will consider a redemption of shares and return of capital to investors. At this point, the Group will crystallise a performance fee.

Performance fees were £6.0m for the year ended 30 June 2017, including £4.9m from the RMMIC.

At 30 June 2017, total performance fee eligible assets (excluding RMMIC) were £358m. Of these assets, £302m were above their benchmark by less than 5% and £56m were above their benchmark by more than 5%. The weighted average rate of performance fees in respect of outperformance on the eligible AUM is 16%.

Administrative Expenses

While administrative expenses grew at a lower rate than underlying revenues, which is evidence of the scalable operating platform within the business, total administrative expenses did increase. This increase related to market data costs as we expanded our coverage of global market indices to support the growth in the geographical spread of Group offerings, as well as previously guided IT cost increases and a half-year impact of rent increases.

Governance costs fell as a result of the reduction in the number of Non-Executive Directors during the year, plus certain project costs in 2016 which were not incurred in 2017.

As previously indicated, the Group has invested in technology in the year, with the move away from PSG for IT infrastructure provision to a new third party provider and the refresh of our hardware and communication links to make the business more resilient. The migration has been completed on budget of £1.1m, and has delivered increases in performance and resilience of Group IT systems.

Management recognise the importance of cost efficiency, and remain committed to continuing growth in pre-tax margins as outlined in Mike's CEO Report.

However in 2018, we anticipate that administrative expense to underlying revenue will be in the range of 20-21%, driven by the following areas of increased spend: occupancy; IT and legal costs relating to investment in the funds platform including the Global Macro Fund; regulatory compliance; and the new ILC team based in Chicago.

In 2016 we increased our footprint in our office on Coleman Street and in the next year we will be adding additional space to provide for expansion. The lease on our Strand office will end in December 2021 and we have taken the opportunity to align all leases to the same end date. In 2018 we will have a full year impact of the rent review on the Strand and increases in business rates.

We will incur the cost increase of the new IT infrastructure of £0.3-£0.4m per annum, consistent with our statements in the prior year. In 2017 we incurred additional legal expenses to establish an Irish UCITS umbrella fund for the launch of the Global Macro Fund. In 2018 we will transition from Credit Suisse the Luxembourg UCITS platform to a new platform provider for the ILC Team. In addition we intend to establish a Delaware LLC and Collective Investment Trust in the US to launch Equity Solutions strategies for the PVT and ILC teams. The expansion of our funds platform will allow us to attract a broader investor base both in the US and Europe.

In 2017 we incurred additional legal costs relating to a number of regulatory and compliance initiatives as a result of changes in the UCITS remuneration regime, market abuse and competition regulations and started the work on the implementation of MiFID II. We anticipate that we will incur additional legal costs ahead of the implementation in the first half of FY 2018.

Remuneration

Remuneration expense includes: (a) fixed remuneration comprising: base salaries, drawings, benefits and associated taxes and; (b) variable remuneration comprising: performance bonus and profit share paid to the partners of RAMAM LLP and applicable taxes; and (c) the amortisation of the fair value of performance share awards under the Performance Share Plan.

Fixed remuneration is allocated to net management and advisory fees. Variable remuneration is accrued on net management and advisory fees, and performance fees.

We had previously stated that we expected the accrual rate of remuneration to be around 54% on net management and advisory fees and 50% on performance fees for the year. However, the strong growth in revenue during the year has allowed us to reduce the accrual rate on net management and advisory fees to 52%, earlier than expected. It is management's intention to reduce this ratio over the medium term, although the level in any given year may be affected by the level of investment in new teams. To the extent that the Group generates significant performance fees, the Directors will also look to lower the remuneration ratio associated with them.

Executive Performance Share Plan (EPSP)

The EPSP was established at the IPO and Executive Directors were given awards over a maximum total of 7.3m shares, which they would be entitled to receive based upon achieving a compound total shareholder return of between 12% and 30% during the period from IPO to 30 June 2018, with a one-year holding period after vesting until 30 June 2019.

The EPSP costs in the income statement comprise the IFRS 2 accounting charge for the scheme and the accrued payroll tax costs related to the awards. The IFRS 2 charge is £452k per annum irrespective of the expected or actual outcome of the scheme. The payroll tax costs vary as a function of the number of shares expected to vest and the expected share price on vesting.

Based upon the TSR as at 30 June 2017, which was 26%, 5.4m shares would vest. However, as the performance period ends on 30 June 2018, the Directors believe that a reasonable estimate of the number of shares which will vest is 4.8m, representing a TSR of 24%. This generates a charge for the year for payroll tax of £1.1m.

Whilst the actual timing of dividends impacts the result, assuming a dividend yield of 5% per annum, full vesting would occur at a share price of approximately £4.30. At a payroll tax rate of 14.3%, this would generate a payroll tax cost of £4.5m and a corporate tax deduction of £6.0m.

Statutory and adjusted profits

Adjusted underlying profit represents net management and advisory fees less associated remuneration, recurring administrative expenses (excluding IT transition costs), depreciation, and finance income and expense.

Adjusted profit comprises adjusted underlying profit, plus performance fees net of associated remuneration and the gain on disposal of the DAA Fund seed position.

The Directors believe that adjusted profit is a measure of the cash operating profits of the business and gives an indication of the profits available for distribution to shareholders.

Adjusted underlying pre-tax margin represents adjusted underlying profit before tax, divided by net management and advisory fees.

Management have previously stated an objective to grow the adjusted underlying pre-tax margin to above 30% in the medium term. In the prior year, the Group's margin fell as the result of several structural changes made by management including the closure of the global thematic equity strategy with the loss of £0.8bn of AUM, plus a fall in project revenue and other advisory business changes.

Capital, liquidity and regulatory capital

The business is strongly cash generative, generating net cash from operations of £24m. Cash and cash equivalents at year end were £31m.

As a business regulated by the UK Financial Conduct Authority, we hold prudent levels of capital resource in order to ensure our financial stability. We undergo an ongoing Internal Capital Adequacy Assessment Process (ICAAP), to ensure that we are holding sufficient levels of equity capital for the scale and nature of our operations and risk.

As at 30 June 2017, adjusting for the effect of the interim and proposed final dividends, and EBT purchases in respect of PSP awards, we have excess qualifying regulatory capital of £8m.

Employee Benefit Trust

The Group's EBT purchases Group shares in the open market to meet the potential vesting of share awards granted under the Group's PSP and DEP share plans, as the Board has stated that grants under these plans will not be dilutive to shareholders.

During the year, the Group's EBT purchased 1.3m shares relating to the previous years' share awards, with a de minimis number being sold as a result of award vestings. The net cost of these transactions was £3.5m and is shown in the statement of changes in equity. As at 30 June 2017, the EBT held 1.9m shares, which broadly corresponds to the number of shares subject to award up to 30 June 2017. The weighted average number of shares in issue has reduced as a result of purchases of own shares by the EBT. The EBT has waived the right to dividends on the shares which it holds.

As at 30 June 2017, the Group had granted share awards which were either expected to vest, or could possibly vest, over 0.6m shares. During the Group's end of year remuneration process, the Group granted share awards over a further 1.0m shares, based upon an estimated grant price. All such share awards are not intended to be dilutive.

Regulatory matters

MiFID II

The changes following from MiFID II and MiFIR (together 'MiFID II') come into effect in January 2018. In broad terms, MiFID II will significantly impact how trading activities are carried on, associated transparency, and also how firms are required to organise and conduct their regulated activities. For the Group, two of the main areas in which MiFID II has an impact relate to enhanced transaction reporting and the charging of research to investors.

The Group's plans to implement enhanced transaction reporting are in place and there is no anticipated increase in administrative costs as a result of this change.

Access to third party research is a critical component in our investment process and is additive to our internal research and screening processes in stock selection and portfolio construction. Third party research provides an important verification process in the development of our investment themes on individual companies and has supported the significant outperformance across our whole range of equity investment strategies.

Historically, the cost of third party research in Equity Solutions has been charged to clients within the expenses of the funds or mandates.

We have reviewed the FCA positon papers with regards to research costs and note the approach taken by our industry peers. We are consulting with our clients to determine how they wish to engage with us with regards to research costs. Once this consultation is complete we will provide an update as to our agreed final position.

CMA Review of advisory and investment management

As part of the Financial Conduct Authority (FCA) Asset Management Market Study the FCA has made a referral to the Competition and Markets Authority (CMA) to carry out a market investigation into the supply and acquisition of investment consultancy services and fiduciary management services to and by institutional investors and employers in the UK.

The CMA has contacted P-Solve Investments Limited and requested information and documents with regards to its investment consulting and fiduciary management business. We are cooperating with these information requests. The review is at an early stage and it is not clear what the outcomes will be.

FCA competition investigation

The Group's subsidiary RAMAM is co-operating with an investigation by the FCA under its concurrent competition powers (note 24). The matter does not affect any clients of the Group or the NAV of any fund or segregated mandate. The Group has not been notified of the outcome of this investigation however, in the event of a financial impact, the Directors do not expect the net outcome to be material to the financial statements.

Dividends

On 31 March 2017, an interim dividend of 5.6p per share was paid which included a special dividend of 1.4p relating to net performance fees. The Directors have declared a second interim dividend of 8.1p per share, of which 2.8p is a special dividend relating to net performance fees to be paid on 3 November 2017. In addition the Directors are proposing to shareholders a final dividend of 6.0p per share, of which 2.8p per share is a special dividend relating to net performance fees.

Total dividends per share paid, declared or proposed for the year ended 30 June 2017 are 19.7p per share, representing 80% of the adjusted underlying profit after tax and 100% of the net performance fee profit after tax. This is an increase in dividends of 107% compared to the prior year.

Kevin Hayes

Chief Financial Officer

Consolidated income statement

The notes to the consolidated financial statements form part of and should be read in conjunction with these financial statements.

Consolidated statement of comprehensive income

The notes to the consolidated financial statements form part of and should be read in conjunction with these financial statements.

Consolidated statement of financial position

The notes to the consolidated financial statements form part of and should be read in conjunction with these financial statements.

The preliminary report was approved by the Board on 22 September 2017.

Consolidated statement of cash flows

The notes to the consolidated financial statements form part of and should be read in conjunction with these financial statements.

Consolidated statement of changes in shareholders' equity

The notes to the consolidated financial statements form part of and should be read in conjunction with these financial statements.

Notes to the consolidated financial statements

1. Basis of preparation

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, International Accounting Standards, International Financial Reporting Interpretation Committee interpretations, and with those parts of the 2006 Act applicable to groups reporting under IFRS as issued by the International Accounting Standards Board and adopted by the European Union ("IFRS") that are relevant to the Group's operations and effective for accounting periods beginning on 1 July 2016.

Going concern

The Directors have a reasonable expectation that the Group and Company have adequate resources to continue in operational existence for the foreseeable future.

In reaching this conclusion the Board has considered budgeted and projected results of the business including a 2018 budget and 3 year forecast for the Group with several scenarios, projected cash flow and regulatory capital requirements, and the risks that could impact on the Group's liquidity and solvency over the next 12 months from the date of approval of the financial statements. Additionally, the capital adequacy of the Group in base and stress scenarios is tested as part of the ICAAP and viability statement process.

Accordingly, the Group and Company financial statements have been prepared on a going concern basis using the historical cost convention, except for the measurement at fair value of certain financial instruments that are held at fair value.

Basis of consolidation

The consolidated financial statements include the Company and the entities it controls (its subsidiaries). Subsidiaries are considered to be controlled where the Group has exposure to variable returns from the subsidiary, the power to affect those variable returns and power over the subsidiary itself. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

Subsidiaries are consolidated from the date that the Group gains control, and de-consolidated from the date that control is lost.

The consolidated financial statements incorporate the results of business combinations using the acquisition method. In the statement of financial position, the subsidiaries' identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. The consolidated financial statements are based on the financial statements of the individual companies drawn up using the standard Group accounting policies. Accounting policies applied by individual subsidiaries have been revised where necessary to ensure consistency with Group policies for consolidation purposes.

All transactions and balances between entities within the Group have been eliminated in the preparation of the consolidated financial statements.

The Employee Benefit Trust is included in the consolidated financial statements of the Group. The trust purchases shares pursuant to the non-dilutive equity awards granted to employees. These purchases and the operating costs of the trust are funded by the Company. The trust is controlled by independent trustees and its assets are held separately from those of the Group.

The consolidated statement of financial position has been presented on the basis of the liquidity of assets and liabilities.

The Group's relationship with fund entities

The Group entities act as the investment managers to funds and segregated managed accounts, and RAMAM is the Authorised Corporate Director (ACD) of River and Mercantile Funds ICVC (collectively 'Investment Management Entities' (IMEs)).

Considering all significant aspects of the Group's relationship with the IMEs, the Directors are of the opinion that although the Group manages the investment resources of the IMEs, the existence of: termination provisions in the Investment Management Agreements (IMAs) which allow for the removal of the Group as the investment manager; the influence exercised by investors in the control of their IME and the arm's length nature of the Group's contracts with the IME; and independent Boards of Directors of the IME, the Group does not control the IME and therefore the assets, liabilities and net profit are not consolidated into the Group's financial statements.

Foreign currencies

The majority of revenues, assets, liabilities and funding are denominated in UK Pounds sterling (GBP/£), and therefore the presentation currency of the Group is GBP. All entities within the Group have a functional currency of GBP, except for those based in the US.

Monetary items which are denominated in foreign currencies are translated at the rates prevailing at the reporting date. Non-monetary items are measured at the rates prevailing on the date of the transaction and are not subsequently re-translated.

The functional currency of the US-based entities is US Dollars and is translated into the presentational currency as follows:

· Assets and liabilities are translated at the closing rate at the date of the respective statement of financial position;

· Income and expenses are translated at the daily exchange rate for the date on which they are incurred; and

· All resulting exchange differences are recognised in other comprehensive income.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Exchange differences arising are recognised in other comprehensive income.

2. Significant accounting policies and significant judgements and estimates

As detailed in note 1, these financial statements are prepared in accordance with IFRS. The significant accounting policies of the Group which impact these financial statements are:

· Impairment of intangible assets, goodwill and investments recorded in previous acquisitions. This involves judgments including business growth and estimates including discount rates, which are described in note 9;

· Recognition of management and performance fee revenues. This involves estimates of AUM/NUM positions for the purposes of accruing revenue, which are described in note 3;

· Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Determining whether provisions are required and at what level, requires both judgment and estimates;

· The accounting for share-based remuneration. This involves estimates of future share prices for national insurance cost and judgments relating to forfeiture rates and business outcomes, which are described in note 7.

3. Revenue

Net management fees

Net management fees represent the fees charged pursuant to an IMA with clients. They are reported net of rebates to clients and commissions paid to third parties and are charged as a percentage of the client's Assets under Management (AUM) or Notional under Management (NUM). The fees are generally accrued on a daily basis and charged to the client either monthly or quarterly. During the year ended 30 June 2017, rebates and commissions totalling £2,094,000 (2016: £1,971,000) were paid to clients and third parties in respect of management fees.

Net advisory fees

Net advisory fees represent fees charged under Investment Advisory Agreements (IAA) and are typically charged on a fixed retainer fee basis or through a fee for the delivery of a defined project. Advisory revenue is reported net of revenue share arrangements with other advisory partners. During the year ended 30 June 2017, £nil was paid to (2016: £68,000 was reclaimed from) a subsidiary of PSG (see related party note 25) and £nil was paid to (2016: £2,000 was reclaimed from) a third party, under revenue sharing arrangements relating to Palisades, which was part of the Group's US business and was disposed of in the prior year. Fees are accrued monthly and charged when the work has been completed.

Performance fees

Performance fees are fees paid under the IMAs for generating excess investment performance either on an absolute basis subject to a high water mark, or relative to a benchmark. Performance fees are calculated as a percentage of the investment performance generated and may be subject to deferral and continued performance objectives in future periods. Performance fees are recognised in income when the quantum of the fee can be estimated reliably and it is probable that the fee will be realised. This occurs once the end of the performance period has been reached. The client is invoiced for the performance fee at the end of the performance period which is generally annually either on the anniversary of their IMA or on a calendar year basis.

Other income

Other income in the prior year included the realised gains and fair value movements relating to fund units held by the ACD (note 26).

4. Divisional and geographical reporting

The business operates through four divisions, however these are not considered as segments for the purposes of IFRS 8 on the basis that resource allocation decisions are not made on the basis of segmental reporting and results not analysed to a profit level. Despite this, the Directors feel that it is useful to the understanding of the results of operations to include certain information.

The net revenue for the year ended 30 June 2017 and 30 June 2016 together with the year-end AUM and NUM, reflect the activities of the respective divisions.

In addition, performance fees of £6.6m (2016: £1.2m) were earned by the Fiduciary Management division and £6.0m (2016: £0.3m) earned by the Equity Solutions division.

No single client accounts for more than 10% of the revenue of the Group (2016: none).

On a geographic basis the majority of the revenues are earned in the UK. The Group has an advisory, derivatives and fiduciary management business in the US and net revenue earned in the US for the year ended 30 June 2017 was £4.8m (2016: £4.2m). The AUM/NUM of the US business was £630m (2016: £648m).

Non-current assets held by the US business include £1.5m (2016: £1.4m) of goodwill.

5. Administrative expenses