Schroders plc (LON:SDR) has today announced its full year results.
| – | We delivered resilient results in 2019, despite the challenging market backdrop. Profit before tax and exceptional items was £701.2 million. |
| – | We made significant progress towards our strategic objectives, with strong growth in our Wealth Management, Private Assets & Alternatives and Solutions businesses. |
| – | We generated total net new business of £43.4 billion, with positive net inflows across all asset classes as the first tranches of the Scottish Widows mandate were transferred to Schroders. |
| – | Assets under management increased 23% to close at a new high of £500.2 billion, although the results were impacted by average assets being up only 2% as net inflows funded late in the year and markets only strongly rose through the fourth quarter. |
| 2019 £m | 2018 £m | Change | |
| Net income | 2,124.8 | 2,123.9 | 0% |
| Operating expenses | (1,423.6) | (1,362.7) | 4% |
| Profit before tax and exceptional items | 701.2 | 761.2 | (8)% |
| Profit before tax | 624.6 | 649.9 | (4)% |
| Profit after tax | 495.7 | 504.7 | (2)% |
| Basic earnings per share before exceptional items (pence) | 201.6 | 215.8 | (7)% |
| Basic earnings per share (pence) | 178.9 | 183.1 | (2)% |
| Total dividend per share (pence) | 114.0 | 114.0 | 0% |
Management statement
Our strategy is to build closer relationships with our end clients in Wealth Management, to expand our capabilities in Private Assets and to grow our asset management business through Solutions.
We generated record net inflows of £43.4 billion in 2019 (2018: net outflows of £9.5 billion), including £32.0 billion from the Scottish Widows mandate into Solutions strategies and £12.6 billion into Schroders Personal Wealth. We expect the remaining assets from the Scottish Widows mandate of around £30 billion to fund through the first half of 2020. Excluding those net inflows which relate to the relationship with Lloyds Banking Group, and despite significant industry headwinds, we saw small net outflows of £1.2 billion.
Assets under management closed the year up 23% at a new high of £500.2 billion (31 December 2018: £407.2 billion). However, average assets under management were up only 2% from 2019 as net inflows funded late in the year and with weaker markets only significantly improving through the fourth quarter.
As we targeted improvements in client and asset longevity, gross outflows decreased to £89.2 billion or 22% of opening assets under management (2018: £100.0 billion, 23%). Gross inflows increased by £42.1 billion to £132.6 billion. However, gross outflows were generally from higher revenue margin products, such as equities, than our gross inflows. A combination of this and other market and FX movements resulted in a two basis point reduction in net operating revenue margin excluding performance fees, carried interest and real estate transaction fees to 45 basis points (2018: 47 basis points).
Net income increased £0.9 million to £2,124.8 million (2018: £2,123.9 million). Changes to the business mix resulted in a decrease of 1% to net operating revenue to £2,052.4 million (2018: £2,070.7 million), including performance fees and net carried interest of £73.1 million (2018: £55.0 million). The decline in net operating revenue was offset by increases in other income, including a greater contribution to profits from associates and joint ventures of £30.5 million (2018: £19.9 million), principally from our long-standing venture with Bank of Communications in China.
Delivering long-term growth for our clients and shareholders is dependent on developing and maintaining an efficient and scalable operating model. We continued to invest in technology improvements across the business, while growing our headcount in areas of strategic growth, such as Wealth Management, Private Assets and in China. Our total compensation ratio remained below our target range at 44% (2018: 43%) and our total cost ratio was 67% (2018: 64%).
Pre-exceptional profit before tax declined 8% to £701.2 million (2018: £761.2 million). We remained focused on driving efficiencies as we implemented structural changes to realign the business towards areas of future growth. The amortisation of intangible assets, along with the cost of structural changes, contributed towards exceptional costs of £76.6 million (2018: £111.3 million). Profit before tax but after exceptional items decreased by 4% to £624.6 million (2018: £649.9 million). Profit after tax and exceptional items was down 2% at £495.7 million (2018: £504.7 million).
Increasingly, our clients are interested not just in the returns from their investments but the impact of those investments. We remain focused on responsible, sustainable investing and have continued to integrate ESG processes across our product range. We have committed to integration across 100% of our managed assets by the end of 2020. We are also focused on delivering sustainable long-term value for all of our stakeholders and have committed to running our global business on a net zero carbon basis.
As a global business, we continue to closely monitor the situation with Covid-19 and follow the guidance of local public authorities. We have put provisions in place to safeguard the health of employees globally, including travel restrictions and remote working where appropriate. At the same time, we are taking steps so that the business will continue to operate without disruption and that client service remains unaffected.
We are presenting more information on our results in a way which is aligned with our strategic objectives and more reflective of how we measure performance. We are reporting the results of our Asset Management segment in four business areas: Private Assets & Alternatives, Solutions, Mutual Funds and Institutional, in addition to our Wealth Management segment. A breakdown of the movement in assets under management in the year on the previous channel presentation can be found in Appendix 1.
Asset Management
Asset Management net income before exceptional items was down 1% to £1,781.2 million (2018: £1,801.2 million), including performance fees and net carried interest of £72.2 million (2018: £54.6 million). The net operating revenue margin before performance fees, carried interest and real estate transaction fees was 43 basis points (2018: 45 basis points). Profit before tax and exceptional items declined 10% to £606.9 million (2018: £670.8 million) and profit before tax fell 4% to £565.5 million (2018: £588.2 million).
Private Assets & Alternatives
Private Assets provide investment opportunities that are available through private markets. Our clients have increased their allocation to private markets and alternative investments in search of longer-term, less correlated and potentially better investment returns.
We have continued to strengthen our position in Private Assets & Alternatives in 2019 with ongoing client demand and selected acquisitions.
In July, we announced that we had reached agreement to acquire a majority stake in BlueOrchard Finance, leaders in impact investing and micro-finance in emerging and frontier markets. We also reinforced our real estate investment capabilities with the acquisition of Blue Asset Management, a Germany-based real estate business.
We generated £2.8 billion of net inflows in 2019, led by demand for private equity and securitised credit mandates. Private Assets & Alternatives has been our fastest growing business area over recent years, with assets under management increasing by more than 125% in the last five years. Assets under management at the end of 2019 were up 16% to £44.2 billion (31 December 2018: £38.0 billion). The net operating revenue margin excluding performance fees, carried interest and real estate transaction fees was 63 basis points (2018: 66 basis points).
Solutions
Increasingly, our clients are not looking for Schroders to simply be a component provider of investment products, but rather, they want us to play a wider role and to offer a complete solution or partnership to help them achieve their financial goals. These relationships are typically long-term in nature and improve our overall client longevity.
Solutions strategies have attracted high levels of client demand, generating £46.0 billion of net new business over the last five years. In 2019, we saw £34.5 billion of net new inflows, most notably through the transfer of the first parts of the Scottish Widows mandate. The net operating revenue margin in Solutions was 21 basis points (2018: 22 basis points). Solutions strategies closed the year with £142.8 billion of assets under management (31 December 2018: £95.9 billion).
Mutual Funds
As part of what might be considered our more traditional asset management business, Mutual Funds are provided through our intermediary network for retail clients and are solely or dual-branded ‘Schroders’.
Our Mutual Fund business proved to be relatively resilient this year, despite the “risk-off” environment at the start of the year. There were net outflows of £1.5 billion and Mutual Fund assets under management ended the year at £102.4 billion (31 December 2018: £95.1 billion). The net operating revenue margin for Mutual Funds was 73 basis points (2018: 75 basis points).
Institutional
Also part of our more traditional asset management business, we continue to provide institutions with index-relative products as a component of their overall investment strategies or as part of a sub-advised mandate.
We saw net outflows from our Institutional business of £7.1 billion in 2019, led by redemptions from equity strategies as clients continued to derisk their portfolios. The net operating revenue margin excluding performance fees was 32 basis points (2018: 33 basis points). Institutional assets under management ended the year at £144.1 billion (31 December 2018: £134.5 billion).
Wealth Management
Wealth Management net income rose 7% to £309.6 million (2018: £289.8 million), including performance fees of £0.9 million (2018: £0.4 million). Profit before tax and exceptional items decreased 6% to £87.5 million (2018: £93.4 million), while profit before tax decreased 22% to £52.9 million (2018: £68.0 million) as it was impacted by exceptional items relating to acquisitions and the structural changes we have made.
We continued to generate good growth in this area, with record net new business of £14.7 billion. We launched Schroders Personal Wealth in the fourth quarter and acquired the wealth management business of Thirdrock in Singapore.
Total assets under management in Wealth Management increased 53% in the year to £66.7 billion (31 December 2018: £43.7 billion). Over five years, Wealth Management assets under management have grown by more than 110%.
The net operating revenue margin before performance fees was 59 basis points (2018: 61 basis points).
Group
The Group segment generated profit before exceptional items of £6.8 million in 2019 (2018: loss of £3.0 million), driven by gains from our investment capital portfolios.
Dividend
The Board will recommend to shareholders at the Annual General Meeting a final dividend of 79.0 pence (2018: 79.0 pence), which is unchanged from 2018. This will bring the total dividend for the year to 114.0 pence (2018: 114.0 pence). The final dividend will be paid on 7 May 2020 to shareholders on the register at 27 March 2020.
Outlook
Despite recent market weakness, our focused strategy, global footprint and diversified business mean we are well placed to generate growth for our clients and shareholders over the long term.
In the near term, Covid-19 is creating considerable uncertainty for economies and markets. We believe that our business resilience is sufficient to deal with this, but the impact on economies and markets will be highly correlated with how effective containment measures are.
There are challenges facing the traditional asset management industry, but we see a range of growth opportunities particularly in our Wealth Management, Private Assets & Alternatives and Solutions business areas, which now account for more than half of our assets under management.
We will retain focus on delivering positive investment outcomes for our clients and reshaping the business towards high quality, long-lasting client relationships. Our focus on efficiency throughout the business will remain key, but we will continue to invest through the cycle for future growth.
Peter Harrison, Schroders Group Chief Executive, commented: “We are pleased that the structural changes we have made in our business have delivered a resilient performance with record net new business of £43.4 billion during the year. As a committed active asset manager, our assets under management exceeded half a trillion pounds for the first time.
Over the last few years we have been re-positioning our business behind a clear vision to move closer to our end clients through Wealth Management, expand our capabilities in Private Assets and grow our Solutions business. Today, these business areas represent over half of our clients’ assets under management.
The year saw three notable events: the successful launch of Schroders Personal Wealth (our joint venture with Lloyds Banking Group), the start of the transfer of the Scottish Widows mandate to Schroders and the establishment of a market-leading position in impact investing and micro-finance through our acquisition of BlueOrchard.
We will maintain a focus on active, responsible investing to create better outcomes for our clients. We will continue to invest for the long-term growth of the business and are confident that our diversified model and differentiated strategy will generate value for our clients and shareholders.
In the near term, Covid-19 is creating considerable uncertainty for economies and markets. We believe that our business resilience is sufficient to deal with this, but the impact on economies and markets will be highly correlated with how effective containment measures are.”
