Final Results

Schroders PLC 04 March 2003 Press Release 4th March 2003 Schroders plc Announcement of Preliminary Results for the year ended 31st December 2002 (unaudited) â€¢ Underlying asset management profit Â£77.0 million (2001: Â£105.7 million) â€¢ Profit before goodwill Â£29.5 million (2001: Â£35.7 million) â€¢ Profit before tax Â£18.9 million (2001: loss Â£8.1 million) â€¢ Funds under management Â£88.3 billion (2001: Â£110.4 billion) â€¢ Total dividend unchanged at 18.5 pence per share Year ended 31st Year ended 31st December 2002 December 2001 Â£mn Â£mn Underlying asset management profit 77.0 105.7 Project expenditure (33.2) (30.0) Redundancy costs (13.7) (9.6) Asset management profit before exceptional items 30.1 66.1 Exceptional items: - (10.8) Prior period error (5.4) - Net loss on sale of subsidiary undertakings Asset management profit 24.7 55.3 Private equity 12.9 (19.6) Group net income/(costs) (8.1) - Profit before goodwill 29.5 35.7 Goodwill: (10.6) (10.4) Amortisation - (23.4) Impairment (10.6) (33.8) Profit before tax and provision for sale of investment banking 18.9 1.9 business Provision for sale of investment banking business - (10.0) Profit/(loss) before tax 18.9 (8.1) Basic earnings/(loss) per share 9.0p (7.0p) Diluted earnings/(loss) per share 9.0p (7.0p) Contacts: Schroders Michael Miles Chairman +44 (0) 20 7658 6476 Michael Dobson Chief Executive +44 (0) 20 7658 6962 Jonathan Asquith Chief Financial Officer +44 (0) 20 7658 6565 Julian Samways Head of Corporate Communications +44 (0) 20 7658 6166 The Maitland Consultancy William Clutterbuck +44 (0) 20 7379 5151 Management Statement The most difficult market conditions in equities that we have seen in 30 years had a direct impact on our results in 2002, but we made good progress in strengthening management, reducing costs and exiting non-core activities. We also returned to profit. Asset management net revenues before exceptional items were Â£440.4 million, down from Â£481.4 million in 2001. Underlying asset management profit, before project expenditure and redundancy costs, was down 27 per cent. to Â£77.0 million. Profit from private equity was Â£12.9 million (2001: loss of Â£19.6 million) mainly derived from the Group's direct and indirect interests in the old Schroder Venture funds. Group net income/(costs) - income on surplus capital less Group central costs and provisions - was a loss of Â£8.1 million (2001: Â£nil), principally as a result of lower interest income on the Group's surplus capital. Profit before goodwill was down 17 per cent. to Â£29.5 million (2001: Â£35.7 million). Profit before tax was Â£18.9 million (2001: loss of Â£8.1 million). The Board has declared a final dividend of 13.0 pence per share, payable on 25th April 2003 to shareholders on the register at 28th March 2003, which brings the total dividend to 18.5 pence per share, unchanged on 2001. Funds Under Management Funds under management ended the year at Â£88.3 billion, down from Â£110.4 billion at the end of 2001. Most of this decline was accounted for by lower equity markets. Net outflows of funds were Â£2.2 billion in 2002 compared to Â£6.0 billion in the previous year. All of this net outflow occurred in the first half of the year, reflecting a pronounced seasonality in the pattern of fund flows. Institutional Fund Management Overall, net outflows of institutional funds were Â£5.3 billion, down from Â£8.8 billion in 2001. In the UK, net outflows of Â£3.4 billion were sharply reduced from the previous year's Â£10.9 billion on the back of improved investment performance. Our flagship pooled fund outperformed its benchmark for a third consecutive year and we are winning an increasing number of specialist mandates. We continue to feel the effects of the industry-wide restructuring away from balanced mandates, but these now represent less than 10 per cent. of our total funds under management. Progress in developing our business in continental Europe continued with net new business during the year of Â£850 million. In Japan we maintained our position as one of the leading foreign managers of Japanese pension funds. Elsewhere in Asia Pacific Australia stood out, finishing the year with funds under management of Â£1.5 billion after net new business flows of Â£700 million. There was a Â£3.0 billion outflow of funds from our Americas business as a result of weak performance in some asset classes. Funds under management at Â£12.1 billion are now well below the peak levels seen five years ago and we expect the outflow of funds to continue in the short term. Longer term, we have taken steps to address this including strengthening the investment process underlying these asset classes. We have also recently appointed a new chief executive in the US. Retail Fund Management We had another strong year in our retail business, growing revenues and improving margins, despite adverse investor sentiment and difficult markets. Gross sales were Â£7.5 billion with net sales of Â£3.4 billion, an increase of 62 per cent. on 2001. These inflows were derived from a broad mix of asset classes, including fixed income. Retail fund performance continues to be strong with over 75 per cent. of UK and Luxembourg domiciled retail assets above the peer group average. This is reflected in the 21 funds rated by Standard & Poor's and the 50 awards won by our funds around the world. In the UK, in a difficult market, net sales of unit trusts were Â£460 million and our market share of new business rose to 6.2 per cent., including the launch of the UK Alpha Plus Fund which raised over Â£80 million in the second half of 2002. In continental Europe, net sales were up 35 per cent. to Â£880 million. In Asia, we raised Â£800 million in structured products during the year, continuing to benefit from our strong relationships with global and local distributors. Net sales in Japan, amounting to over Â£850 million, were well ahead of the previous year. Banks and insurance companies are an increasingly important distribution channel. Our ability to bring both global and localised support to these relationships has resulted in global distributors accounting for over 30 per cent. of retail net sales in 2002. We also joined with Standard & Poor's to offer a multi-manager service aimed at the sub-advisory market outside the US. Private Banking Progress is being made in private banking, refocusing the business towards an asset management-led strategy, supported by wealth structuring and banking products. We are now providing our clients with an enhanced strategic asset allocation framework incorporating all alternative investment classes, together with access to products from other managers through a multi-manager service in partnership with Frank Russell. We are close to completing a major systems upgrade which will enable us to enhance our service to clients and reduce costs. Consistent with our strategy of focusing on the high net worth market in Europe, we have sold our private banking business in Miami. Alternative Assets We remain the leading manager of property unit trusts in the UK with property assets under management of Â£3.5 billion. We manage seven property unit trusts including specialist funds providing exposure to retail warehouses, residential property, out-of-town shopping centres and to properties in Central London and the City. We continue to develop our range of absolute return long-only and hedge fund products, including our two funds of hedge funds and three single strategy hedge funds, and we intend to launch further hedge funds in 2003. We raised over Â£150 million for our first private equity fund of funds and, with further demand from our institutional and private clients, we will shortly be launching a second fund. Board Peter Sedgwick retired as Chairman at the end of the year. The Board once again expresses its gratitude for the major contribution he made to the Group over more than 30 years. Michael Miles was appointed Chairman with effect from 1st January 2003. There were several other changes to the Board during the year. Daniel Janssen and Ralph Robins retired as non-executive Directors in April, and David Swensen joined the Board as a non-executive Director. William Turner and Alva Way will retire as non-executive Directors from the Board at the Annual General Meeting in April 2003. The Board wishes to thank Mr Turner and Mr Way for their significant contribution to the Group over many years. Kevin Parry was appointed a non-executive Director with effect from 1st January 2003. Richard Horlick joined the Board as an executive Director with effect from 1st January 2003 and John Troiano stepped down from the Board on 31st December 2002, whilst remaining a member of the Group Management Committee. Outlook As the bear market in equities enters its fourth year the environment for our business continues to be very challenging. In the short term, our response to this is to continue to reduce the cost base. In 2002, total costs were reduced by about Â£50 million on 2001. More importantly, within this figure administrative costs fell by Â£19 million. This year, we expect to see more progress on the underlying cost base, while lower redundancy and project costs will contribute a further reduction of about Â£25 million to total costs. Overall, we expect total costs in 2003 to be more than Â£100 million lower than 2001. We have sought to reduce costs without damaging the long-term revenue generating capability of the business. Indeed we have continued to invest in the development of a highly efficient operating platform, the benefits of which will be apparent when funds under management are growing again. More important than reducing costs is the change process at Schroders, designed to strengthen management, exit or outsource non-core activities, bring a sharper focus to our business and improve investment performance. We have more work to do in some asset classes, where weak performance has resulted in fund outflows which have outweighed the business we have won elsewhere as a result of product innovation, superior returns and our global reach. We are actively engaged in adding to our skill base and strengthening the investment process supporting these asset classes. The strength of our balance sheet is a competitive advantage in the current environment even if, short term, it depresses returns. With increasing cost pressures on asset managers and with valuations well below where they were two years ago, opportunities are likely to arise to deploy our surplus capital by way of acquisitions to complement and accelerate organic growth. Our key asset continues to be the talented people who work at Schroders. We would like to extend our thanks to them for their commitment during a particularly testing period. Michael Miles Michael Dobson Chairman Chief Executive 4th March 2003 Consolidated Profit and Loss Account For the year ended 31st December 2002 2002 2001 Continuing Discontinued Total Continuing Discontinued Total operations operations operations operations Â£mn Â£mn Â£mn Â£mn Â£mn Â£mn Net revenues 471.2 1.4 472.6 508.1 0.9 509.0 Losses on current asset investments (5.1) - (5.1) (13.6) - (13.6) Administrative expenses (421.2) (6.2) (427.4) (439.3) (7.2) (446.5) Depreciation (30.5) (1.6) (32.1) (39.2) (0.5) (39.7) Amortisation and impairment of (10.6) - (10.6) (6.5) (27.3) (33.8) goodwill Group operating profit/(loss) 3.8 (6.4) (2.6) 9.5 (34.1) (24.6) Share of operating profit of 7.7 - 7.7 1.5 - 1.5 associated undertakings Total operating profit/(loss) 11.5 (6.4) 5.1 11.0 (34.1) (23.1) Provision for sale of investment - - - - (10.0) (10.0) banking business Provision for loss on sale of - (6.3) (6.3) - - - subsidiary undertakings Profit on disposal of subsidiary 0.9 - 0.9 - - - undertakings Interest receivable and similar 22.0 0.8 22.8 31.1 1.4 32.5 income Amounts written off fixed asset (3.3) - (3.3) (5.3) - (5.3) investments Interest payable and similar (0.3) - (0.3) (2.2) - (2.2) charges Profit/(loss) on ordinary 30.8 (11.9) 18.9 34.6 (42.7) (8.1) activities before tax Tax credit/(charge) on profit/ (loss) on ordinary activities 7.7 (12.6) Profit/(loss) on ordinary 26.6 (20.7) activities after tax Minority interests (0.5) 0.1 Profit/(loss) attributable to 26.1 (20.6) shareholders Dividends (53.3) (53.9) Loss retained by the Group for the (27.2) (74.5) financial year Basic earnings/(loss) per share 9.0p (7.0p) Diluted earnings/(loss) per share 9.0p (7.0p) Statement of Total Consolidated Recognised Gains and Losses For the year ended 31st December 2002 2002 2001 Â£mn Â£mn Profit/(loss) for the financial year 26.1 (20.6) Exchange translation adjustments to foreign currency net investments (14.0) (3.1) Total recognised gains and losses 12.1 (23.7) Reconciliation of Movements in Consolidated Shareholders' Funds For the year ended 31st December 2002 2002 2001 Â£mn Â£mn Profit/(loss) for the financial year 26.1 (20.6) Dividends (53.3) (53.9) (27.2) (74.5) New share capital subscribed 3.0 16.0 Shares to be issued (3.0) 12.9 Cancellation of non-voting ordinary shares (19.4) - Exchange translation adjustments (14.0) (3.1) Net decrease in shareholders' funds (60.6) (48.7) Equity shareholders' funds brought forward 1,112.5 1,161.2 Equity shareholders' funds carried forward 1,051.9 1,112.5 Consolidated Balance Sheet 31st December 2002 2002 2001 Â£mn Â£mn Â£mn Â£mn Fixed assets Intangible assets - goodwill 35.0 45.5 Tangible assets 17.8 103.3 Investments 100.5 99.6 153.3 248.4 Insurance assets attributable to unit linked policyholders 2,134.6 2,912.1 2,287.9 3,160.5 Current assets Debtors due within one year 409.0 510.8 Debtors due after more than one year 262.1 272.5 Investments 897.1 806.1 Cash and balances with banks 736.4 809.0 2,304.6 2,398.4 Creditors - amounts falling due within one year (1,098.5) (1,242.2) Net current assets 1,206.1 1,156.2 Total assets less current liabilities 3,494.0 4,316.7 Creditors - amounts due after more than one year (256.6) (228.7) Insurance liabilities attributable to unit linked (2,134.6) (2,912.1) policyholders Provisions for liabilities and charges (50.9) (62.9) Net assets 1,051.9 1,113.0 Capital and reserves Called up share capital 295.7 299.0 Share premium account 17.8 15.2 Shares to be issued 9.9 12.9 Capital reserves 129.4 130.0 Profit and loss account 599.1 655.4 Equity shareholders' funds 1,051.9 1,112.5 Minority interests - 0.5 Total shareholders' funds including minority interests 1,051.9 1,113.0 Consolidated Cash Flow Statement For the year ended 31st December 2002 2002 2001 Â£mn Â£mn Net cash inflow from operating activities 78.7 187.0 Dividends/distributions received from associates 0.5 0.8 Returns on investments and servicing of finance Interest received 21.1 34.4 Interest paid (0.3) (2.2) Net cash inflow from returns on investments and servicing of finance 20.8 32.2 Taxation United Kingdom corporation tax recovered/(paid) 8.6 (1.1) Overseas tax paid (13.2) (1.0) Total tax paid (4.6) (2.1) Capital expenditure and financial investments Tangible fixed assets -purchases (91.1) (142.9) -disposals 104.3 71.0 Fixed asset investments -purchases (52.9) (937.6) -disposals 53.5 876.5 Net cash inflow/(outflow) from capital expenditure and financial 13.8 (133.0) investments Acquisitions and disposals Associated undertakings -acquisitions (1.3) (13.0) -disposals - 0.2 Subsidiaries -acquisitions (0.5) (3.3) -cash (disposed)/acquired (2.1) 2.1 -disposals 3.3 - Net cash outflow from acquisitions and disposals (0.6) (14.0) Dividends paid (53.5) (54.1) Net cash inflow before use of liquid resources and financing 55.1 16.8 Net cash outflow from management of liquid resources (97.7) (312.2) Financing Purchase of non-voting ordinary shares for cancellation (19.4) - Decrease in cash (62.0) (295.4) Notes to the Accounts Basis of Preparation The preliminary results for the year ended 31st December 2002 are unaudited. The financial information included in this statement does not constitute the Group's statutory accounts for the years ended 31st December 2001 or 31st December 2002. The financial information for the year ended 31st December 2001 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies and include the Independent Auditors' report on those accounts which was unqualified. The Independent Auditors' report on the statutory accounts for the year ended 31st December 2002 has not yet been signed. These accounts are expected to be dispatched to shareholders on 20th March 2003, and will be delivered to the Registrar of Companies after adoption at the Annual General Meeting to be held at 31 Gresham Street, London, EC2V 7QA on 23rd April 2003. Accounting Policies In preparing the financial information included in this statement there have been no material changes to the accounting policies previously applied by the Group in reporting its statutory accounts for the year ended 31st December 2001, except that Financial Reporting Standard 19, 'Deferred Tax' has been fully adopted. Its adoption has had no material impact on the results for the year or the net assets of the Group. Segmental Reporting - by Class of Business The Group has three continuing classes of business: asset management, private equity and Group net income/(costs). Asset management principally comprises investment management, property asset management and advisory services including private banking; private equity comprises private equity, venture capital and buy-out funds; Group net income/(costs) represents the return on the investment of surplus capital, Group central costs and provisions, and big ticket leasing. 2002 Â£mn Asset Asset Total asset Private Group net Total Total Total management management management equity income/ continuing discontinued continuing discontinued (costs) operations operations operations operations Net revenues 439.0 1.4 440.4 5.7 26.5 472.6 471.2 1.4 (Losses)/gains on (1.7) - (1.7) 2.5 (5.9) (5.1) (5.1) - current asset investments Administrative expenses (395.1) (6.2) (401.3) (1.0) (25.1) (427.4) (421.2) (6.2) Depreciation (12.7) (1.6) (14.3) - (17.8) (32.1) (30.5) (1.6) Amortisation of (10.6) - (10.6) - - (10.6) (10.6) - goodwill Group operating profit/ 18.9 (6.4) 12.5 7.2 (22.3) (2.6) 3.8 (6.4) (loss) Share of operating - - - 7.7 - 7.7 7.7 - profit of associated undertakings Total operating profit/ 18.9 (6.4) 12.5 14.9 (22.3) 5.1 11.5 (6.4) (loss) Provision for loss on - (6.3) (6.3) - - (6.3) - (6.3) disposal of subsidiary undertakings Profit on disposal of 0.9 - 0.9 - - 0.9 0.9 - subsidiary undertakings Interest receivable and 7.1 - 7.1 1.3 14.4* 22.8 22.0 0.8 similar income Amounts written off - - - (3.3) - (3.3) (3.3) - fixed asset investments Interest payable and (0.1) - (0.1) - (0.2) (0.3) (0.3) - similar charges Profit/(loss) on 26.8 (12.7) 14.1 12.9 (8.1) 18.9 30.8 (11.9) ordinary activities before tax Shareholders' funds 440.6 24.2 464.8 124.1 463.0 1,051.9 1,027.7 24.2 *Contains Â£0.8mn income relating to discontinued operations. 2001 Â£mn Asset Asset Total asset Private Group net Disposal Total Total Total management management management income/ of continuing discontinued continuing discontinued equity (costs) investment operations operations operations operations banking business Net revenues 469.7 0.9 470.6 4.3 34.1 - 509.0 508.1 0.9 (Losses)/gains on - - - (15.0) 1.4 - (13.6) (13.6) - current asset investments Administrative (404.2) (7.2) (411.4) (6.5) (28.6) - (446.5) (439.3) (7.2) expenses Depreciation (14.0) (0.5) (14.5) - (25.2) - (39.7) (39.2) (0.5) Amortisation and (6.5) (27.3) (33.8) - - - (33.8) (6.5) (27.3) impairment of goodwill Group operating profit 45.0 (34.1) 10.9 (17.2) (18.3) - (24.6) 9.5 (34.1) /(loss) Share of operating - - - 1.5 - - 1.5 1.5 - profit of associated undertakings Total operating profit 45.0 (34.1) 10.9 (15.7) (18.3) - (23.1) 11.0 (34.1) /(loss) Loss on sale of the - - - - - (10.0) (10.0) - (10.0) investment banking business Interest receivable 10.8 1.4 12.2 1.5 18.8 - 32.5 31.1 1.4 and similar income Amounts written off - - - (5.3) - - (5.3) (5.3) - fixed asset investments Interest payable and (1.6) - (1.6) (0.1) (0.5) - (2.2) (2.2) - similar charges Profit /(loss) on 54.2 (32.7) 21.5 (19.6) - (10.0) (8.1) 34.6 (42.7) ordinary activities before tax Shareholders' funds 477.7 25.7 503.4 121.6 487.5 - 1,112.5 1,086.8 25.7 Consolidated Cash Flow Statement 2002 2001 Â£mn Â£mn Reconciliation of total operating profit/(loss) to net cash flow from operating activities Total operating profit/(loss) 5.1 (23.1) Depreciation of tangible fixed assets 32.1 39.7 Amortisation and impairment of goodwill 10.6 33.8 Decrease/(increase) in debtors 66.4 (43.6) (Decrease)/increase in creditors (44.7) 71.1 Increase in debt securities in issue 13.8 92.3 Loss on sale on tangible fixed assets 1.9 0.1 Share of operating profit of associated undertakings (7.7) (1.5) Release of provisions for bad debts - (2.0) Provision for liabilities and charges 4.8 6.6 Losses on current asset investments 5.1 13.6 Other non-cash movements (8.7) - Net cash inflow from operating activities 78.7 187.0 2002 2001 Â£mn Â£mn Reconciliation of net cash flow to movement in net funds Decrease in cash in the year (62.0) (295.4) Cash inflow from issue of certificates of deposit (13.8) (92.3) Cash outflow from increase in liquid resources 97.7 312.2 Changes in net funds resulting from cash flows 21.9 (75.5) Non-cash movements in liquid resources (17.3) 260.5 Non-cash movements in debt securities 7.7 (6.1) Opening net funds 1,516.7 1,337.8 Closing net funds 1,529.0 1,516.7 Tax on profit on ordinary activities 2002 2001 Â£mn Â£mn Profit/(loss) on ordinary activities before tax 18.9 (8.1) Tax credit/(charge) on ordinary activities before tax 7.7 (12.6) Profit/(loss) on ordinary activities after tax 26.6 (20.7) Expected tax (charge)/credit at 30% (5.7) 2.4 Actual credit/(charge) per accounts 7.7 (12.6) Variance 13.4 (15.0) Effects of: Sale of leasing companies 5.5 3.8 Profits/(losses) in low tax jurisdictions 7.3 4.5 Re-evaluation of deferred tax assets 5.2 (2.4) Non-tax deductible goodwill amortisation and impairment (3.2) (10.2) Unrelieved losses (2.6) (4.8) Sundry 1.2 (5.9) Total 13.4 (15.0) Five year financial summary 2002 2001 2000* 1999* 1998* Â£mn Â£mn Â£mn Â£mn Â£mn Profit/(loss) before tax 18.9 (8.1) 275.3 324.0 231.7 Tax 7.7 (12.6) (53.8) (80.2) (62.5) Profit/(loss) after tax before minority 26.6 (20.7) 221.5 243.8 169.2 interests Minority interests (0.5) 0.1 (0.2) 0.8 (1.4) Profit/(loss) for the year 26.1 (20.6) 221.3 244.6 167.8 Earnings per share Basic earnings/(loss) per share (pence) 9.0 (7.0) 74.6 82.8 57.2 Diluted earnings/(loss) per share (pence) 9.0 (7.0) 74.2 82.5 56.9 Dividends Cost (Â£mn) 53.3 53.9 54.1 53.9 48.3 Per share (pence) 18.5 18.5 18.5 18.5 16.5 Shareholders' funds (Â£mn) 1,051.9 1,112.5 1,161.2 1,370.4 1,170.5 Net assets per share (pence) 356 372 391 464 397 * Includes the investment banking business sold in April 2000. Operating and Financial Review Overview Schroders is a global manufacturer of fund management products for institutional, retail and private clients. Its operations have a broad geographical span covering the main financial centres of the world, with 34 offices divided organisationally between the Americas, Europe and Asia Pacific. The management of international assets is concentrated in 3 locations, with a further 7 responsible for domestic assets only and the balance acting as sales offices. We are committed to an integrated approach to the management of the business, designed to achieve maximum leverage of its intellectual and operational resources across geographical regions and asset classes. Over recent years Schroders has tightened its focus on asset management, outsourcing administrative functions to specialist third party suppliers and disposing of non-core activities. Within the asset management field, the products cover a wide range of asset classes and client segments, but traditionally the management of equity portfolios has dominated the mix. As equity market levels have declined over the last three years and the attractiveness of Schroders' fixed income products has increased, the asset base has diversified somewhat, although 69 per cent. of client investments were still in equities at the end of 2002. Schroders' client mix has also developed beyond its original institutional bias, with retail and private banking accounting for 20 per cent. of funds under management and 36 per cent. of net revenues in 2002. Most of Schroders' income derives from selling fund management services through third party or institutional distribution channels. The principal exception to this rule is in private banking, where the retention of direct distribution capacity and banking and trust services to supplement the core fund management service is central to the business model. Results The Group profit before tax of Â£18.9 million for 2002 compares with a loss of Â£8.1 million in 2001. The profits of the asset management business fell, largely due to the very difficult market conditions prevailing during the year. The private equity business contributed a profit of Â£12.9 million compared with a loss of Â£19.6 million in 2001 and Group net income /(costs) saw a loss of Â£8.1 million (2001: Â£nil). Notwithstanding the profit before tax of Â£18.9 million, there was a tax credit of Â£7.7 million. The rate was favourably impacted by the release of deferred tax on the disposal of two leasing companies and the high level of private equity income, which is largely untaxed. For a more detailed reconciliation see page 13. Basic and diluted earnings/(loss) per share were both 9.0 pence (2001: (7.0) pence). Asset Management Net revenues in asset management before exceptional items fell from Â£481.4 million to Â£440.4 million. The underlying profit from the core asset management business was Â£77.0 million (2001: Â£105.7 million), a fall of 27 per cent. from 2001. Asset management costs decreased from Â£425.9 million to Â£415.6 million in 2002. Underlying asset management costs (administrative expenses and depreciation less project and redundancy costs) fell by 5 per cent. from Â£386.3 million to Â£368.7 million. Project expenditure was up 11 per cent. from Â£30.0 million to Â£33.2 million. Project expenditure comprises the costs associated with (i) the replacement programme for certain of the Group's core I.T. systems and (ii) certain key Group outsourcing projects. Including the provision for loss on sale of subsidiary undertakings of Â£6.3 million, which has previously been disclosed within project expenditure, the total rises to Â£39.5 million, a 32 per cent. increase on 2001. The completion of our outsourcing of custody and administration services to JP Morgan has been delayed until 2004 but the additional costs arising from the delay are not expected to be significant. An agreement to outsource the transfer agency function for the UK retail business was signed with International Financial Data Services in June; this is due for completion in the first quarter of 2003. The sales of Schroder Pensions and Schroder Hermes were negotiated in 2002 and completed in early 2003. Redundancy costs rose by Â£4.1 million to Â£13.7 million. A change in the estimation of performance fee income has resulted in an additional accrual of Â£4.2 million in the year. Private Equity The Group's private equity profit of Â£12.9 million (2001: loss of Â£19.6 million) was strongly influenced in the second half of 2002 by the sale of Homebase by Permira Europe II, a private equity fund in which the Group has significant direct and indirect interests. Marking to market the Group's holding in Schroder Ventures International Investment Trust plc led to an unrealised gain of Â£3.9 million. We wrote down interests in other funds by Â£4.7 million. Group Net Income/(Costs) Group net income/(costs) comprises income on the Group's surplus capital less Group costs - that is those costs not directly attributable to the operating companies - and the results of the leasing business (before any tax credits which are taken through the tax line). Falling interest rates and increased Group costs, including a Â£2.9 million unrealised loss on the value of unallocated own shares in the employee trusts, were responsible for most of the decline in this segment. Pensions Pensions have been accounted for in accordance with SSAP 24 with a net cost of Â£0.5 million relating to the Group's UK defined benefit scheme. Under FRS 17 the market value of the assets of the scheme is Â£302.0 million and the deficit on the Scheme is Â£10.9 million. The FRS 17 charge for the year would have been Â£3.2 million. Funds Under Management Total Institutional Retail Private Â£bn Â£bn Â£bn Banking Â£bn 31st December 2001 110.4 91.8 11.9 6.7 Market movement (19.5) (15.8) (2.7) (1.0) Net asset (losses)/gains (2.2) (5.3) 3.4 (0.3) Sales of businesses (0.4) - (0.2) (0.2) 31st December 2002 88.3 70.7 12.4 5.2 Funds under management decreased by Â£22.1 billion from Â£110.4 billion at 31st December 2001 to Â£88.3 billion at 31st December 2002, of which Â£19.5 billion arose principally from lower equity markets. New and existing clients contributed Â£11.0 billion, of which Â£7.8 billion was from retail and private banking clients. Commentary The great majority of Schroders' income is derived from ad valorem fees charged on assets under management. With an average of more than 70 per cent. of client investments in equities, in a year in which some stock market indices fell by as much as 30 per cent., the Group's revenues were severely impacted. By way of illustration, if quarterly income in 2002 had stayed at the depressed levels of the fourth quarter of 2001, net revenues for asset management for the year would have been about Â£465 million as opposed to the reported figure of Â£440.4 million. Market levels were the key driver in the development of Group performance year on year and, if markets continue to be volatile, will continue to be so in 2003. Management took a number of steps in the year to reduce expenditure in the short and medium term. These included reducing headcount from 2,890 at the beginning of the period to 2,392, by means of natural wastage, outsourcing and a targeted redundancy programme. The Group also continued to pursue a range of I.T. and operational projects designed to increase the efficiency and resilience of the Group's infrastructure and reduce costs. These measures were accompanied by the disposal or closure of a number of non-core overseas operations and the sale of the loss-making defined contribution pensions administration business in the UK. Overall, costs in the asset management business in 2002 fell by Â£10.3 million, despite an increase in redundancy and project costs of Â£7.3 million. The cost base in 2003 will be further reduced as the full year effects of some of the measures taken in 2002 come through. Redundancy and project costs are also expected to fall back sharply from 2002 levels. Longer term, the financial success of the Group is dependent on meeting client expectations in terms of fund management performance and service levels. A number of personnel and organisational changes were implemented in the year with a view to improving the quality and consistency of investment processes, including the recruitment of a new global head for our institutional business and the establishment of the post of Chief Investment Officer. Market Trends Performance for the year unfolded against the background of a variety of issues and trends, at differing stages of development, which have influenced the positioning of the Group. A number of issues have arisen in connection with political, regulatory or governance initiatives (e.g. Myners, Sandler, Higgs and Smith) and have been amply debated elsewhere. Others, such as the need to search for production cost efficiencies or develop alternative asset allocation strategies, have been driven by the particular pressures on the asset management industry and its clients caused by the extended decline in equity markets. The gradual polarisation of participants between the manufacture of fund management products and their distribution - a key secular trend in the European asset management industry - received further impetus in 2002. Cost pressures, particularly in the insurance sector, led to the outsourcing of asset management activities to third parties who can offer specialist expertise and economies of scale. The general trend towards consumer choice and the growth of competing open architecture offerings contributed further to this process. It is argued that in the competition for margins between manufacturers and distributors, distributors tend to have the advantage. We believe that producers such as Schroders, who have leading brands and manufacture consistent, high quality products, are able to defend their position successfully on the basis of service quality and consumer choice. Risks Management and the Directors review the risks facing the Group on a regular basis and consider appropriate measures to mitigate or counteract them. In their most recent assessment, the main external risk was that of further severe declines in equity markets. Such an event would not only cause a further reduction in revenues, to the detriment of the bottom line, but would contribute additionally to client disenchantment with equities as an asset class and have a detrimental effect on morale in general. Internally, the success of people businesses is driven by the quality of their personnel. Weak markets focus management and competitors alike on the need to identify, attract and incentivise top performers. In 2002 we overhauled our appraisal and objective-setting processes to ensure that our people know how they are rated and what is expected of them. We have also reviewed our long term compensation strategies to align the interests of key staff more closely with those of shareholders. At an operational level, the risks implicit in Schroders' extensive I.T. renewal programme and administration outsourcing strategy are kept under close review. Having started in 2000, much of the work on these projects is now complete and a number of the new systems and working arrangements are already in production. 2003 will see further implementations and if these are successfully completed operational stresses on the Group will fall substantially. In the meantime, the new systems are considerably more robust in operation than many of their less systematically developed predecessors, which are gradually being decommissioned. The division of back office responsibilities between outsourced suppliers in a variety of different locations has also added a level of resilience, particularly when companies are faced with a heightened risk of disruption in an unsettled world environment. Capital Allocation and Liquidity 2002 2001 Â£mn Â£mn Asset management 358 371 Surplus: Liquid funds 457 376 Private equity 124 122 Other Schroder funds* 72 87 Leasing 41 148 694 733 Group provisions (35) (37) 1,017 1,067 Goodwill* 35 46 1,052 1,113 * Disclosed within the asset management segment. Shareholders' funds at 31st December 2002 were Â£1.05 billion. During the year, the Group repurchased and cancelled 3,732,779 of its own non-voting ordinary shares at a cost of Â£19.4 million and an average cost of Â£5.21. The table above sets out management's view of the allocation of capital between the different activities in the Group. On the basis of this analysis, the Group's holding companies have some Â£694 million of surplus capital available to fund acquisitions or investment opportunities. The main changes in the liquidity position over the year have been caused by the payment of dividends (Â£53.5 million) and the sale of two leasing companies, which resulted in the release into liquid funds of Â£101 million previously used to fund leasing assets. Liquid funds are invested in cash, bank deposits or segregated money market and bond portfolios. With the exception of private equity, the great majority of surplus capital is held directly in sterling instruments or hedged back into sterling. Schroders carries no significant borrowings on the balance sheet and working capital requirements are largely confined to the funding of fee receivables billed in arrears and the maintenance of regulatory capital. The capital allocated to asset management, which consists of the equity capital and reserves of the relevant operating companies, is sufficient to cover its consolidated regulatory capital needs nearly twice over. Cash Flows A significant proportion of the cash flows reflected in the financial statements relate to the private banking businesses. Stripping these out leaves significant cash flows from (i) the sale of the leasing companies mentioned above, (ii) cash inflows during the year relating to net interest received (Â£20.8 million) and net disposals of tangible fixed assets (mainly relating from the sale of assets leased out under operating leases) (Â£13.2 million) and (iii) cash outflows relating to payment of dividends (Â£53.5 million) and the buyback of shares (Â£19.4 million). Corporate Actions The Group's major corporate actions in 2002 were: â€¢ Sale of subsidiaries: â€¢ Schroder Asset Management Limited, the Group's retail subsidiary in Thailand (January 2002) â€¢ JHS Leasing (6/98) Limited and JHS Leasing (9/98) Limited (September 2002) â€¢ Schroder & Co. Trust Bank, the Group's private bank in Miami (October 2002) â€¢ Schroder Hermes Limited (completed January 2003) â€¢ Schroder Pensions Limited (completed February 2003) â€¢ Liquidation of two South African subsidiaries, Schroder Investment Management (Africa) Limited and Schroder Mutual Funds (Africa) Limited (June 2002). â€¢ Increase in shareholding in PT Schroder Investment Management Indonesia from 85 per cent. to 99 per cent. (August 2002). â€¢ Acquisition of the remaining 49 per cent. minority interest in Schroder Mildesa Investment Management S.A. (Argentina) (December 2002). Credit Ratings Short term Long term Fitch IBCA F1 A+ Standard & Poor's A1 A Currency Exposure Over 95 per cent. of the Group's capital is invested in four currencies: Sterling, US dollars, Euros, Swiss francs. Sterling alone accounts for 72 per cent. Dividends The Directors recommend an unchanged final dividend of 13.0 pence per share, bringing dividends for the year to 18.5 pence per share or Â£53.3 million of which Â£26.1 million will be covered from the Group's after tax profits and the balance will be funded from reserves. Performance Measurement The primary measures of the Group's performance for the asset management business are the underlying costs: net revenues ratio, 84 per cent. (2001: 80 per cent.), net revenues on average funds under management, 44 basis points (bp) (2001: 42 bp) and underlying costs on average funds under management, 37 bp (2001: 33 bp). Forward-looking statements This preliminary announcement contains certain forward-looking statements with respect to the financial condition, results of operations and businesses of Schroders plc. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. Nothing in this announcement should be construed as a profit forecast. This information is provided by RNS The company news service from the London Stock Exchange

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