2nd Mar 2017 07:00
2 March 2017
Peter Harrison, Group Chief Executive, commented: "We delivered good results in 2016, with profit before tax and exceptional items increasing 6% to £644.7 million. Strong investment performance, positive net inflows and strategic acquisitions led to assets under management and administration increasing 27% to £397.1 billion. We have made good progress against our strategic objectives and see a number of future growth opportunities. Our diversified business model, a strong financial position and willingness to invest behind the business means we are well placed to take advantage of these opportunities, despite the challenges faced by the industry. Consistent with these good results, the Board is recommending a final dividend of 64 pence per share, bringing the total dividend for the year to 93 pence per share, an increase of 7%".
* Defined and explained in the glossary.
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Management Statement Schroders had a good year in 2016, despite the headwinds facing the Asset Management industry. Our results are testament to the strength of our diversified business model and our client-centric approach across the business. Net income, profit and assets under management and administration reached record levels. Net operating revenue increased 7% to £1,712.8 million (2015: £1,600.7 million) and net income increased by 8% to £1,789.7 million (2015: £1,656.3 million). Profit before tax and exceptional items rose by 6% to £644.7 million (2015: £609.7 million) and profit before tax grew 5% to £618.1 million (2015: £589.0 million). We generated £1.1 billion of net new business during the year, with continued demand from institutional clients offsetting outflows from Intermediary and Wealth Management clients. We also continued to invest in the future growth of the business and we entered into a number of strategic relationships and completed three acquisitions. Acquisitions increased our assets under management by £6.7 billion, and resulted in a new category of client assets with £11.1 billion of assets under administration introduced through the acquisition of Benchmark Capital. Benchmark Capital is a technology-led, high-quality adviser support business based in the UK, which has the potential to significantly enhance the service we provide to UK intermediary and wealth management clients. To reflect this change to the business, we have updated the relevant key performance indicator to assets under management and administration. The weakness of sterling increased assets under management and administration by approximately £42 billion. Assets under management and administration at the end of the year reached £397.1 billion (31 December 2015: £313.5 billion). Asset Management Asset Management net operating revenue was up 7% to £1,489.5 million (2015: £1,393.4 million), including performance fees of £38.8 million (2015: £35.7 million). Profit before tax and exceptional items rose 6% to £572.4 million (2015: £540.5 million) and profit before tax increased 5% to £553.9 million (2015: £528.4 million). Investment performance remained strong with 74% (2015: 72%) of assets outperforming their benchmark or peer group over 3 years. Over a 5 year period, the outperformance figure was 85% (2015: 76%). The net operating revenue margin, excluding performance fees, was 46 basis points (2015: 49 basis points). The reduction in margin was due to both changes in business mix and some fee pressure. The net operating revenue margin in the Institutional channel was 32 basis points (2015: 34 basis points) and in the Intermediary sales channel was 73 basis points (2015: 74 basis points). We generated net new business of £1.4 billion in 2016. Net inflows of £4.3 billion were generated in the Institutional sales channel, predominantly in multi-asset and fixed income products and from clients in North America and the UK. Assets under management in the Institutional sales channel at the end of December were £226.3 billion (31 December 2015: £181.0 billion). Macro uncertainty and volatile markets impacted demand in the Intermediary sales channel and we saw net redemptions of £2.9 billion, predominantly from Equity products. Assets under management in the Intermediary sales channel at the end of December were £120.1 billion (31 December 2015: £100.9 billion). We have entered into a number of strategic relationships this year. These are aligned with our strategic priorities and will deepen our investment expertise or expand the scope of our distribution. In North America, a key area of strategic growth, we entered into a relationship with Hartford Funds to manage and distribute a 'Hartford Schroders' branded fund range to intermediary clients in the US. The fund range launched in late October and we have already seen positive client momentum. We also strengthened our investment presence in the region with the acquisition in September of a securitised credit team in New York. As many of our clients have begun to seek higher returns away from traditional asset classes and towards private markets, we have expanded our capabilities in this area. In March, we made an investment in NEOS Finance Group (NEOS), acquiring a 25% stake in the specialist Dutch direct lending firm. NEOS provides institutional investors with access to a debt financing platform for small and medium sized enterprises. Wealth Management Wealth Management net operating revenue increased 8% to £223.3 million (2015: £207.3 million), including performance fees of £2.4 million (2015: £0.6 million). Profit before tax and exceptional items was up 8% to £66.4 million (2015: £61.3 million) and profit before tax was £56.3 million (2015: £60.5 million). Net flows in early 2016 were impacted by clients' preference for private assets after limited market returns in previous years and also for property in the UK. There were total net outflows of £0.3 billion. Benchmark Capital is now included as a separate division within Wealth Management and increased assets under management and assets under administration by £3.4 billion and £11.1 billion respectively. Wealth Management assets under management and administration at the end of the year were £50.7 billion (31 December 2015: £31.6 billion). In October, we announced that we had reached an agreement to acquire the discretionary assets under management of C. Hoare & Co. This deal completed on 17 February 2017 and around 1,800 clients representing approximately £2.3 billion of assets migrated to the Schroders platform. Group The Group segment comprises returns on investment capital, including seed capital deployed in building a track record in new investment strategies, and central costs. Profit before tax and exceptional items for the year was £5.9 million (2015: £7.9 million) and profit before tax was £7.9 million (2015: £0.1 million). Shareholders' equity at 31 December 2016 was £3.2 billion (31 December 2015: £2.8 billion). Dividend Consistent with our policy, the Board will recommend to shareholders at the Annual General Meeting an increase in the final dividend of 10%, taking the final dividend to 64.0 pence (2015: 58.0 pence). This will bring the total dividend for the year to 93.0 pence (2015: 87.0 pence), an increase of 7%. The final dividend will be paid on 4 May 2017 to shareholders on the register at 31 March 2017. Quarterly reporting As a company that remains focused on building sustainable growth for the long term, we have chosen to amend our reporting timetable. We will no longer publish full financial results in the first and third quarter, but will now provide the market with an update on assets under management and administration. We will continue to provide financial results for the full year and half year. We plan on holding an investor day in early October. Outlook The year has started well, but we are mindful of industry headwinds and that market returns remain difficult to predict. This is likely to weigh on client demand, particularly within the Intermediary sales channel, and create volatility in flows in the medium term. Conversely, amongst institutional clients, we see a pipeline of business which is focused on long-term asset allocation to meet their specific investment needs. Despite the challenges faced by the industry, we remain well placed to continue to build future growth with a highly diversified business model, a strong financial position and the willingness to invest behind the business. Additional information
Assets under management and administration Twelve months to 31 December 2016
Three months to 31 December 2016
Income and cost metrics for the Group
† Before exceptional items. * Defined and explained in the glossary.
Copies of this announcement are available on the Schroders website: www.schroders.com. Peter Harrison, Group Chief Executive, and Richard Keers, Chief Financial Officer, will host a presentation and webcast for the investment community, to discuss the Group's results at 9.00 a.m. GMT on Thursday, 2 March 2017 at 31 Gresham Street, London, EC2V 7QA. The webcast can be viewed live at www.schroders.com/ir. For individuals unable to attend the presentation or participate in the live webcast, a replay will be available from midday on Thursday, 2 March 2017 at www.schroders.com/ir. The Annual Report and Accounts will be available on the Schroders website: www.schroders.com on 17 March 2017. This announcement contains inside information. Legal Entity Identifier: 2138001YYBULX5SZ2H24.
Forward-looking statements This announcement, the Annual Report and Accounts for 2016 from which it is extracted, and the Schroders website may contain forward-looking statements with respect to the financial condition, performance and position, strategy, results of operations and businesses of the Schroders Group. Such statements and forecasts involve risk and uncertainty because they are based on current expectations and assumptions but relate to events and depend upon circumstances in the future and you should not place reliance on them. Without limitation, any statements preceded or followed by or that include the words 'targets', 'plans', 'sees', 'believes', 'expects', 'aims', 'confident', 'will have', 'will be', 'will ensure', 'estimates', 'likely' or 'anticipates' or the negative of these terms or other similar terms are intended to identify such forward-looking statements. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by forward-looking statements and forecasts. Forward-looking statements and forecasts are based on the Directors' current view and information known to them at the date of this statement. The Directors do not make any undertaking to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Nothing in this announcement or in the Annual Report and Accounts or on the Schroders website should be construed as a forecast, estimate or projection of future financial performance. Investment performance Investment performance as referred to in this management statement is calculated by Schroders, using published benchmarks for products, where available, for Asset Management only. It excludes private equity, LDI and externally managed GAIA funds, and funds which do not have the required track record. If no benchmark is published or agreed with the client but the fund is listed in competitor rankings, the relative position of the fund to its peer group is used. Funds with no benchmark but an absolute return target over the one or three-year period are measured against that absolute target. Funds with no benchmark but an absolute return target over the one, three or five-year period are measured against that absolute target. Funds with no benchmark and no target may be measured against a cash return, if appropriate. As at 31 December 2016, such comparator data existed for 87% of Asset Management assets under management over one year, for 74% over three years and for 63% over five years. More information can be found in the 2016 Annual Report and Accounts.
Consolidated income statement for the year ended 31 December 2016
1 Previously referred to as Net revenue. 2 Non-controlling interest is presented in the Consolidated statement of changes in equity. 3 Prior year final dividend and current year interim dividend paid during the year. 4 Please refer to notes 1 and 2 for a definition and further details of exceptional items.
Consolidated statement of comprehensive income for the year ended 31 December 2016
1 Non-controlling interest is presented in the Consolidated statement of changes in equity.
Consolidated statement of financial position at 31 December 2016
1 Non-controlling interest is presented in the Consolidated statement of changes in equity.
Consolidated statement of changes in equity for the year ended 31 December 2016
Consolidated statement of changes in equity for the year ended 31 December 2015
Consolidated cash flow statement for the year ended 31 December 2016
Basis of preparation The financial information included in this statement does not constitute the Group's statutory accounts within the meaning of Section 434 of the Companies Act 2006 (the Act). The statutory accounts for 2015 have been delivered to the Registrar of Companies and the auditors' opinion on those accounts was unqualified and did not contain a statement made underSection 498(2) or Section 498(3) of the Act. An unqualified auditors' opinion has also been issued on the statutory accounts for the year ended 31 December 2016, which will be delivered to the Registrar of Companies in due course. The consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS), which comprise Standards and Interpretations approved by either the International Accounting Standards Board or the IFRS Interpretations Committee or their predecessors, as adopted by the European Union (EU), and with those parts of the Act applicable to companies reporting under IFRS. The financial statements and related notes have been reformatted to reflect the way in which employee benefits expenses are managed internally. Operating expenses are now presented net of gains and losses on financial instruments held to hedge deferred fund awards. 2016 operating expenses includes £25.6 million of gains related to these financial instruments. The new presentation provides a more relevant basis on which to measure the Group employee benefits expense. The 2015 comparative amount (loss of £1.1 million) has not been re-presented. The reconciliation of net cash from operating activities within the Consolidated cash flow statement and note 13 has been reformatted. This reformatting provides greater transparency of the movements in the loans and deposits balances within Wealth Management. Comparative information has also been reformatted. The presentation of the income statement includes separate disclosure of exceptional items. The policy for exceptional items is set out in note 2. 1. Segmental reporting
Operating segments The Group has three business segments: Asset Management, Wealth Management and the Group segment. Asset Management principally comprises investment management including advisory services, equity products, fixed income securities, multi-asset investments, real estate and other alternative asset classes such as commodities. Wealth Management principally comprises investment management, wealth planning and banking services provided to high net worth individuals and charities. Benchmark Capital Limited (Benchmark Capital) was acquired on 15 December 2016 (see note 14) and now also forms part of the Wealth Management segment. The Group segment principally comprises the Group's investment capital and treasury management activities, business strategy and corporate development activities and the management costs associated with governance and corporate management. Segment information is presented on the same basis as that provided for internal reporting purposes to the Group's chief operating decision maker, the Group Chief Executive. Operating expenses include an allocation of costs between the individual business segments on a basis that aligns the charge with the resources employed by the Group in particular business areas. This allocation provides management information on the business performance to manage and control expenditure.
1 Previously referred to as Net revenue.
1 Previously referred to as Net revenue.
2. Exceptional items Exceptional items are significant items of income and expenditure that have been separately presented by virtue of their nature to enable a better understanding of the Group's financial performance. Exceptional items relate principally to acquisitions made by the Group, including amortisation of acquired intangible assets and one-off costs relating to the Group's strategic relationship with Hartford Funds.
3. Revenue Revenue comprises:
4. Net gains on financial instruments and other income
5. Operating expenses Operating expenses include:
The employee benefits expense net of hedging of £790.9 million (2015: £741.8 million) includes a credit of £0.7 million (2015: £7.8 million charge) that is presented within exceptional items, comprising a £2.0 million net reduction (2015 £7.8 million charge) of compensation costs relating to acquisitions partially offset by £1.3 million (2015: nil) of restructuring costs. Pre-exceptional compensation costs include a bonus charge of £356.2 million (2015: £359.2 million) relating to discretionary bonuses linked to the Group's performance. 6. Tax expense Analysis of tax charge reported in the income statement:
The UK standard rate of corporation tax for 2016 is 20% (2015: effective rate of 20.25%). The tax charge for the year is higher (2015: higher) than the UK standard rate of corporation tax for the period of 20%. The differences are explained below:
7. Earnings per share Reconciliation of the figures used in calculating basic and diluted earnings per share:
The earnings per share calculations are based on profit after tax excluding non-controlling interest of £0.5 million (2015: £0.1 million).
8. Dividends
Dividends of £9.2 million (2015: £8.2 million) on shares held by employee trusts have been waived; dividends may not be paid on treasury shares. The Board has recommended a 2016 final dividend of 64.0 pence per share (2015 final dividend: 58.0 pence per share), amounting to £174.7 million (2015 final dividend: £157.7 million). The dividend will be paid on 4 May 2017 to shareholders on the register at 31 March 2017. The final dividend will be accounted for in 2017. The Company offers a dividend reinvestment plan (DRIP). The last date for shareholders to elect to participate in the DRIP for the purposes of the 2016 final dividend is 10 April 2017. Further details are contained on our website.
9. Fair value measurement disclosures The Group holds financial instruments that are measured at fair value. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. The fair value of financial instruments may require some judgement or may be derived from readily available sources. The degree of judgement involved is reflected below, although this does not necessarily indicate that the fair value is more or less likely to be realised. For investments that are actively traded in financial markets, fair value is determined by reference to official quoted market prices. For investments that are not actively traded, fair value is determined by using quoted prices from third parties such as brokers, market makers and pricing agencies. Financial assets that have no quoted price principally consist of investments in private equity, derivatives and certain loans in Wealth Management. The determination of fair value for these instruments requires significant judgement, particularly in determining whether changes in fair value have occurred since the last formal valuation. The Group's financial instruments have been categorised using a fair value hierarchy that reflects the extent of judgements used in the valuation. These levels are based on the degree to which the fair value is observable and are defined as follows:
The Group holds certain assets and liabilities at fair value. Their categorisation within the fair value hierarchy is shown below:
1 The fair value of financial instruments not held at fair value approximates to their carrying value.
1 The fair value of financial instruments not held at fair value approximates to their carrying value.
Movements in assets and liabilities categorised as level 3 during the year were:
Due to a change in the methodology applied by the Group's third party pricing provider, certain debt securities were transferred from level 1 to level 2 during the year (2015: no transfers from level 1 to level 2). This change resulted in £703.3 million of debt securities held within Financial assets and £1,927.7 million of debt securities held within Assets backing unit-linked liabilities being transferred from level 1 to 2. This change did not represent degradation in the quality of assets held. No financial assets were transferred from level 2 to level 1 during the year (2015: none).
10. Goodwill and intangible assets
Of the total goodwill of £454.9 million (2015: £359.1 million), £320.2 million (2015: £290.2 million) is allocated to Asset Management and £134.7 million (2015: £68.9 million) to Wealth Management. The Group acquired £44.0 million of intangible assets as a result of business combinations completed in 2016 (see note 14). Additionally the Group has intangible assets arising from the 2013 acquisition of Cazenove Capital Holdings Limited (Cazenove Capital); the proportion of assets allocated to Asset Management (£34.1 million at 2 July 2013) is being charged to the income statement over four years, and the proportion allocated to Wealth Management (£66.7 million at 2 July 2013) over eight years.
11. Share capital and share premium
On 21 December 2016, Schroders plc issued 233,623 non-voting ordinary shares as part of the consideration paid for the acquisition of Benchmark Capital (see note 14).
12. Own shares Own shares include the Group's shares (both ordinary and non-voting ordinary) that are held by employee benefit trusts. Movements in own shares during the year were as follows:
During the year 2.2 million own shares were purchased and held for hedging share-based awards. 3.3 million shares awarded to employees vested in the period and were transferred out of own shares. The total number of shares in the Company held within the Group's employee benefit trusts comprise:
13. Reconciliation of net cash from operating activities
1 2015 has been reformatted for consistency with the 2016 presentation, see Basis of preparation. Net cash from operating activities includes cash outflows of £2.9 million (2015: £11.2 million) in respect of exceptional items.
14. Business combinations
The Group completed three business combinations during the year. On 15 December 2016, the Group acquired a 65% interest in Benchmark Capital, a technology-led adviser support business based in the United Kingdom. Benchmark Capital comprises a wealth management business including an IFA network and a full service technology platform. The acquisition provides the Group with enhanced capabilities to meet the needs of retail investors and contributed £3.4 billion of AUM and £11.1 billion of AUA within Wealth Management. On 16 September 2016, the Group acquired a securitised credit business (Securitised Credit) through an asset purchase agreement. The acquisition contributed £3.3 billion of Asset Management AUM and broadens the Group's fixed income offering. On 1 February 2016, the Group took a controlling interest in Secquaero by increasing its holding from 30.0% to 50.1%. This transaction increased the Group's existing relationship with Secquaero, a Swiss based insurance linked securities (ILS) business. Net assets acquired The fair values of the net assets acquired in the transactions together with the goodwill and intangible assets arising are as follows:
Benchmark Capital Goodwill arising on the acquisition of Benchmark capital represents the value of the acquired business arising from:
Goodwill arising on the acquisition of Benchmark Capital will not be deductible for tax purposes. The measurement of the £11.1 million of non-controlling interest (NCI) was determined as the proportion of identifiable net assets at acquisition attributable to third parties. Securitised Credit The goodwill arising from the acquisition is attributable to the anticipated profitability of the business acquired arising from increased investment capabilities in the future. Secquaero The goodwill arising from the acquisition is attributable to the anticipated profitability of the business acquired arising from increased investment capabilities in the future. The measurement of the £2.2 million of NCI recognised at the acquisition date was determined as the proportion of identifiable net assets at acquisition attributable to third parties. At 1 February 2016 the fair value of the 30.0% equity interest held in Secquaero was £4.9 million. As a result of remeasuring the equity interest to fair value at the acquisition date, a gain of £2.7 million was recognised through net gains on financial instruments and other income in the Group's income statement. On acquisition, the Group recognised an obligation to purchase the remaining 49.9% shareholding in Secquaero. This obligation amounted to £9.1 million and was recorded as a financial liability in the Consolidated statement of financial position, with a corresponding debit recorded within Other movements in the Consolidated statement of changes in equity. Impact of the business combinations on the Group's income statement In the period between the acquisition dates and 31 December 2016, the three acquired businesses contributed £10.4 million to the Group's net income. The contribution to profit before tax and exceptional items was £2.1 million and exceptional operating and other expenses of £3.6 million were incurred. If the transactions had been completed on 1 January 2016, the Group's net income for the year before exceptional items would have been £1,828.9 million and profit before tax and exceptional items would have been £652.2 million (profit before tax and after exceptional items: £617.3 million).
15. Events after the reporting period
On 17 February 2017, the Group acquired the Wealth Management business of C. Hoare & Co. The acquisition contributed approximately £2.3 billion of discretionary Wealth Management AUM and increases the Group's scale and capability for its UK private clients. The initial consideration was satisfied by means of a £70.0 million cash payment, of which approximately 63% is represented by goodwill and approximately 37% is represented by intangible assets. The goodwill is not expected to be deductible for tax purposes. Due to the structure of the acquisition, the determination of the final amount is subject to review.
Key risks and mitigations
Our key risks and mitigations can be read by accessing the link below. Click on or paste the following link into your web browser to view the associated PDF document. http://www.rns-pdf.londonstockexchange.com/rns/2950Y_-2017-3-1.pdf
Statement of Directors' responsibilities
Directors' statement To the best of their knowledge and belief, each of the Directors listed below confirms that:
Directors:
1 March 2017
Five year consolidated financial summary
Exchange rates - closing
Glossary
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