Half-year Report
Schroders plcHalf-year results to 30 June 2017 (unaudited)27 July 2017
*H1 2016 net flows have been restated from £0.7 billion to £1.0 billion to exclude income drawdowns from Wealth Management, which are now included within investment returns.
Peter Harrison, Group Chief Executive, commented: "We have delivered another set of good results, with profit before tax and exceptional items increasing 23% to £361.5 million. Assets under management and administration have reached a new high of £418.2 billion. Underlying progress in all regions was encouraging and we are building out our capabilities in Private Assets. We are confident in our ability to continue identifying, and investing in, areas of future growth. Markets have remained buoyant in the first half of the year, but we remain cognisant that these trends can be volatile and that market returns are difficult to predict. Our diversified business model has proven that it is well placed to adapt to the changing landscape and to continue to create value for clients and shareholders over the long term."
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Management Statement It has been a good start to 2017, with our diversified business model performing well and continuing to generate ongoing growth. Net operating revenues increased by 18% to £940.1 million (H1 2016: £794.9 million) and profit before tax and exceptional items rose 23% to £361.5 million (H1 2016: £293.7 million). This reflects our ability to deliver revenue growth with cost discipline, resulting in the total cost ratio improving to 62.9% (H1 2016: 64.8%). We generated net new business of £0.8 billion (H1 2016: £1.0 billion) in the first six months of the year. There was positive net new business from Institutional and Wealth Management clients, as well as a return to positive net flows within Intermediary branded funds, partially offset by outflows in Intermediary sub-advised. Assets under management and administration ended the period at a new high of £418.2 billion (30 June 2016: £343.8 billion). Asset Management Asset Management net operating revenue was up 18% to £809.3 million (H1 2016: £687.8 million), including performance fees of £13.2 million (H1 2016: £6.4 million). Profit before tax and exceptional items rose 21% to £310.6 million (H1 2016: £257.6 million) and profit before tax increased 21% to £301.0 million (H1 2016: £249.1 million). Assets under management at the end of June were £363.3 billion (30 June 2016: £310.0 billion). The net operating revenue margin before performance fees was 45 basis points (FY 2016: 46 basis points). We generated net new business of £0.2 billion in the first half of the year (H1 2016: £1.1 billion). The Institutional channel continued to deliver, with net inflows of £1.4 billion and strong demand for Multi-asset strategies and from UK and North American clients. Assets under management in Institutional at the end of June were £238.6 billion. In the Intermediary channel, we saw net outflows of £1.2 billion. Within branded funds, there were £4.0 billion of net inflows, reflecting improved investor sentiment. Demand was led by Equity products and from clients in continental Europe, as well as a strong return to positive net flows in the UK. However, there were net outflows of £5.2 billion from sub-advised mandates, including a significant Multi-asset mandate in North America. Assets under management in Intermediary at the end of June were £124.7 billion. In April we announced an agreement to acquire Adveq, a Swiss-based high-quality specialist private equity solutions business. This is consistent with our strategy of accelerating our growth into Private Assets and further diversifying our product offering and we expect the deal to complete in the near future. Wealth Management Wealth Management net operating revenue increased 22% to £130.8 million (H1 2016: £107.1 million), including performance fees of £0.6 million (H1 2016: £1.9 million). Profit before tax and exceptional items was up 40% to £45.5 million (H1 2016: £32.4 million) and profit before tax rose 28% to £36.4 million (H1 2016: £28.4 million). There were net inflows of £0.6 billion (H1 2016: outflows of £0.1 billion) in the first half, £0.4 billion of which came through Benchmark Capital. The acquisition of the wealth management business of C.Hoare & Co. completed in February and brought around 1,800 clients representing £2.5 billion of assets under management. Assets under management and administration at the end of June were £54.9 billion (30 June 2016: £33.8 billion). The net operating revenue margin before performance fees was 62 basis points (FY 2016: 65 basis points). Group The Group segment comprises central costs and returns on investment capital. Profit before tax and exceptional items in the first half of 2017 was £5.4 million (H1 2016: £3.7 million). Shareholders' equity at 30 June 2017 was £3.2 billion (31 December 2016: £3.2 billion). Dividend The Board has declared an interim dividend of 34.0 pence per share (interim dividend 2016: 29.0 pence per share). The dividend will be payable on 21 September 2017 to shareholders on the register at 18 August 2017. Outlook Despite the headwinds facing the industry we believe there are growth opportunities and we are confident in our ability to identify, and invest in, areas of future growth. Markets have remained buoyant in the first half of the year, but we remain cognisant that these trends can be volatile and that market returns are difficult to predict. Our diversified business model has proven that it is well placed to adapt to the changing landscape and to continue to create value for clients and shareholders over the long term.
Additional information Assets under management and administration Six months to 30 June 2017
1Wealth Management flows exclude income drawdowns which are now included within investment returns. 2Assets under management and administration comprise assets managed or advised on behalf of clients (Assets Under Management) and assets where Schroders solely provides administrative support through the Benchmark Capital business (assets under administration or AUA).
Investment performance Investment performance data has been calculated by Schroders to give shareholders and financial analysts general guidance on how our assets under management are performing. The data is aggregated and is intended to provide historical comparisons to prior reporting periods. All calculations for investment performance in this statement are made gross of fees with the exception of those for which the stated comparator is a net of fees competitor ranking. When a product's investment performance is discussed or shared with a client or potential client it is specific to the strategy or product: for Intermediary clients, performance will be shown net of fees at the relevant fund share-class level; for Institutional clients, it will typically be shown gross of fees with a fee schedule for the strategy supplied.
Investment performance has remained strong to 30 June 2017, with 76% of Asset Management assets outperforming over one year, 73% over three years and 84% over five years. This compares to 75%, 74% and 85% respectively to 31 December 2016. The calculation includes 100% of internally-managed Asset Management assets, excluding Liability-Driven Investment (LDI) strategies, that have a complete track record over the respective reporting period. Assets held in LDI strategies, which currently amount to £25 billion, are excluded as these are not seeking to outperform a stated objective but to match the liability profile of pension funds. Assets managed by third parties are excluded and primarily comprise the Luxembourg-domiciled GAIA fund range of £5.5 billion and private equity assets of £0.5 billion. Performance is calculated relative to the relevant stated comparator for each strategy as below. These fall into one of four categories, the percentages for each of which refer to the three year calculation:
Metrics for the Group
†Before exceptional items. *Defined and explained within the 2016 Annual Report and Accounts, available on the Schroders investor relations website www.schroders.com/ir. The calculation basis of the ratios is unchanged from the year end. 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 half-year results at 9.00am GMT +1 on Thursday 27 July 2017 at 31 Gresham Street, London, EC2V 7QA. The webcast can be viewed live at www.schroders.com/ir and www.cantos.com. For individuals unable to participate in the live webcast, a replay will be available from 1.00pm GMT +1 on Thursday 27 July on www.schroders.com/ir. This announcement contains inside information. Legal Entity Identifier: 2138001YYBULX5SZ2H24.
Forward-looking statements This interim management statement 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', 'likely', 'estimates' 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 interim management statement should be construed as a forecast, estimate or projection of future financial performance. Half-year financial statements Consolidated income statement
1Please refer to notes 2 and 3 for a definition and further details of exceptional items. 2Non-controlling interest is presented in the Consolidated statement of changes in equity. 3The 2016 comparatives have been reformatted to reflect the way in which employee benefits expenses are managed internally. See note 1.
Consolidated statement of comprehensive income
1Non-controlling interest is presented in the Consolidated statement of changes in equity.
Consolidated statement of financial position
1Non-controlling interest is presented in the Consolidated statement of changes in equity.
Consolidated statement of changes in equity
1A separate presentation of non-controlling interest is included following the acquisition of Benchmark Capital Limited and an increase in the Group's interest in Secquaero Advisors AG during 2016. 2Other comprehensive losses reported in the net exchange differences reserve represent foreign exchange gains and losses on the translation of foreign operations net of hedging. Other comprehensive losses reported in the associates and joint ventures reserve and losses in the fair value reserve represent post-tax fair value movements on available-for-sale assets held. Other comprehensive income reported in the profit and loss reserve represent post-tax actuarial gains.
Consolidated statement of changes in equity
1Other comprehensive income reported in the net exchange differences reserve represent foreign exchange gains and losses on the translation of foreign operations net of hedging. Other comprehensive (losses)/income reported in the associates and joint ventures reserve and the fair value reserve represent post-tax fair value movements on available-for-sale assets held. Other comprehensive income reported in the profit and loss reserve represent post-tax actuarial gains. Consolidated cash flow statement
Explanatory notes to the Half-year financial statements Within the notes to the Half-year financial statements, all current and comparative data covering periods to (or as at) 30 June are unaudited. Data given in respect of the year ended 31 December 2016 is audited. 1. Basis of preparation The Half-year financial statements are unaudited and do not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006 (the Act). The statutory accounts for 2016, which were prepared in accordance with International Financial Reporting Standards (IFRS), comprising 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, have been delivered to the Registrar of Companies. The auditors' opinion on those accounts was unqualified and did not contain a statement made under Section 498 of the Companies Act 2006. The Half-year financial statements have been prepared in accordance with International Accounting Standard (IAS) 34 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority. The Half-year 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 cash awards. This was previously presented in net gains on financial instruments and other income. Operating expenses of £629.2 million for the six months ended 30 June 2017 (six months to 30 June 2016: £550.3 million) include £6.1 million of gains related to these financial instruments (six months ended 30 June 2016: gains of £10.2 million). The new presentation provides a more relevant basis on which to measure the Group employee benefits expense. The Group has considerable financial resources, a broad range of products and a geographically diversified business. As a consequence, the Directors believe that the Group is well placed to manage its business risks in the context of the current economic outlook. Accordingly, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. They therefore continue to adopt the going concern basis in preparing these Half-year financial statements. The accounting policies applied in these Half-year financial statements are consistent with those applied in the Group's statutory accounts for 2016. The Group did not implement the requirements of any Standards or Interpretations which were in issue and which were not required to be implemented at the half year. The Group expects to implement IFRS 9 'Financial Instruments' and IFRS 15 'Revenue from Contracts with Customers' on 1 January 2018. The Group does not anticipate that IFRS 9 or IFRS 15 will have a material impact on the Group's results. The Group continues to assess the impact of IFRS 16 'Leases' which becomes effective on 1 January 2019. No other Standards or Interpretations issued are expected to have an impact on the Group's financial statements. 2. Exceptional items Exceptional items are significant items of income and expenditure that have been presented separately 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. 3. Segmental reporting 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 and a wealth management business through an independent financial advisor network. 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.
1The 2016 comparatives have been reformatted to reflect the way in which employee benefits expenses are managed internally. See note 1. 4. Revenue
5. Net gains on financial instruments and other income
1The 2016 comparatives have been reformatted to reflect the way in which employee benefits expenses are managed internally. 6. Operating expenses
1The 2016 comparatives have been reformatted to reflect the way in which employee benefits expenses are managed internally. 7. Tax expense Analysis of tax charge reported in the income statement:
Analysis of tax charge reported in other comprehensive income:
Analysis of tax (credit)/charge reported in equity:
8. Earnings per share Reconciliation of the figures used in calculating basic and diluted earnings per share:
There have been no material transactions involving shares or potential shares since 30 June 2017 and before the publication of these Half-year financial statements. 9. Dividends
The Board has declared an interim dividend of 34.0 pence per share (interim dividend 2016: 29.0 pence), amounting to £92.9 million (H1 2016: £78.9 million) in total. The dividend will be paid on 21 September 2017 to shareholders on the register at 18 August 2017. 10. Property, plant and equipment
11. 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 funds, 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:
1The fair value of financial instruments not held at fair value approximates to their carrying value. There were no material transfers of financial assets or liabilities between different levels in the fair value hierarchy during the period.
1The fair value of financial instruments not held at fair value approximates to their carrying value. 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 ended 31 December 2016. 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 ended 31 December 2016. Movements in assets and liabilities categorised as level 3 during the period were:
12. Share capital and share premium
During the period, 0.2 million non-voting ordinary shares were bought back by the Group and cancelled.
13. Own shares Own shares include the Group's shares (both ordinary and non-voting ordinary) that are held by employee trusts or in treasury. Movements during the period were as follows:
During the period 0.2 million non-voting ordinary shares were bought back for a value of £5.4 million and cancelled. 14. Reconciliation of net cash from operating activities
15. Business combinations C. Hoare & Co. On 17 February 2017, the Group acquired the wealth management business of C. Hoare & Co. for consideration of £72.0 million. The acquisition contributed £2.5 billion of discretionary Wealth Management AUM and increases the Group's scale and capability for its UK private clients. The £72.0 million of consideration was represented by £50.0 million of goodwill, £26.5 million of intangible assets and a deferred tax liability of £4.5 million. The goodwill arising on the acquisition represents the value of the acquired business arising from:
Goodwill arising on the acquisition will not be deductible for tax purposes. In the period between the date of acquisition and 30 June 2017, the acquired business contributed £8.0 million to the Group's net income within the Wealth Management segment. The contribution to profit before tax and exceptional items was £6.0 million and exceptional operating expenses of £1.4 million were incurred in respect of amortisation of acquired intangible assets. If the acquisition had completed on 1 January 2017, the Group's pre-exceptional net income for the period would have been £977.0 million. Profit before tax and exceptional items for the period on the same basis would have been £363.6 million (profit before tax and after exceptional items: £344.4 million). The post-exceptional figures include deductions for the additional amortisation charges. Adveq Holding AG On 20 April 2017, the Group announced an agreement to acquire Adveq Holding AG (Adveq). The Group expects the transaction to complete in the near future. Adveq's results for the six months ended 30 June 2017 have not been included in these financial statements.
Key risks Like any other asset management and wealth management business, we are exposed to a range of risks. These risks, if not managed properly, increase the possibility of the Group not being able to meet its objectives. Some of them, like the risks inherent in taking active investment decisions on behalf of clients, are the risks we are in business to take. The key risks to which the Group will be exposed in the second half of 2017 are expected to be substantially the same as those described on pages 38 to 43 in the 2016 Annual Report and Accounts, and include: strategic risks; business risks such as investment performance risk; market, credit, liquidity and capital risks; and operational risks including conduct and regulatory risk and third-party service provider risk.
Directors' responsibility statement On behalf of the Directors, I confirm to the best of my knowledge that the Half-year results:
A list of current Directors is maintained on the Schroders plc website: www.schroders.com. On behalf of the Board Richard Keers Chief Financial Officer 26 July 2017
Independent review report to Schroders plc Report on the Half-year financial statements Our conclusion We have reviewed Schroders plc's Half-year financial statements in the Half-year results of Schroders plc for the six month period ended 30 June 2017. Based on our review, nothing has come to our attention that causes us to believe that the Half-year financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority. What we have reviewed The Half-year financial statements comprise:
The Half-year financial statements included in the Half-year results have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority. As disclosed in note 1 to the Half-year financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. Our responsibilities and those of the Directors The Half-year results, including the Half-year financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the Half-year results in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority. Our responsibility is to express a conclusion on the Half-year financial statements in the Half-year results based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. What a review of Half-year financial statements involves We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. We have read the other information contained in the Half-year results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the Half-year financial statements. PricewaterhouseCoopers LLP Chartered Accountants London 26 July 2017
Notes: a. The maintenance and integrity of the Schroders plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the Half-year financial statements since they were initially presented on the website. b. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
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