Ninety One Group H1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
November 20, 2024

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to the 'ninety one Interim Results Presentation for the half year to 30 September, 2024. As usual, I will highlight the key numbers before and give a business review and then Kim MacFarlane, our Finance Director will present the financial review. I will then conclude with an outlook before we take questions. Those of you who are participating through the webcast can submit questions during the presentation via the chat function at the bottom of your screen.

Operator

So over this period, assets under management grew by 3%, ending the reporting period at 127,400,000,000 while net outflows persisted. Financial assets did well over the period, but the appetite for risk assets outside the United States has remained muted and depressed flows. Basic earnings per share for the period was 7.8p, down from 8.9p per share and adjusted earnings per share, our preferred metric fell by 11% to 7.3p per share. The dividends per share came down in line with the adjusted earnings to 5.4p per share. Our adjusted operating profit margin for this period was 30.5%.

Operator

It was important to note that underlying earnings excluding variable income remained flat compared to the previous reporting period. Demand for risk asset and risk on strategies remained muted during the reporting period and that translated into continued net outflows as I've said above. This was offset by positive performance in financial markets in general and risk assets in particular. The performance was supported by the interest rate cycle. Market consensus suggests that developed market interest rates are now in a downward trajectory.

Operator

We are also delighted to report to you that our credit platform has been substantially enhanced over the reporting period and we are looking ahead to exciting growth. After the half year, we have secured anchor investment commitments in excess of US0.5 billion dollars for our emerging market transition debt strategy and our South African infrastructure credit strategy has also been seed funded. We are closing our 3rd Africa credit opportunities fund during this quarter and preparing for an additional strategy to be launched before the end of the financial year. We're also preparing to go to market with our 2nd European Credit Opportunities Fund after the successful deployment of Fund 1. I will remind you that we have built our credit business organically over many years from absolutely nothing and it's ready to roll now.

Operator

The remit of our infrastructure credit strategy has been extended to Asia, which is really significant for us. And we're seeing exciting transactions in the pipeline. Demand in multi asset credit space is also building up. And this, of course, is supported by a significant investment in skills and systems in this area that is all already reflected in the income statement. We are excited about the prospects of this area as I've said earlier.

Operator

We've delivered competitive and improving investment performance during the period. This remains a key priority for 'ninety one. We are mindful that our main task is to deliver and sustain investment performance over the long term. This is about creating and sustaining a high performance culture and nurturing this with the appropriate resources and talent. I'm delighted to report that we have been seen substantially better inflows since September in an industry where flows in recent years have been dominated by developed market fixed income, money market and allocations to private markets and passive.

Operator

It is too early to call for a return to emerging markets and active equities, but what I can confirm is that the business activity is up and that our pipeline has grown substantially in recent months. We have taken a significant step to bolster our market leadership in South Africa. Today, we're announcing that Sanlam and 91 have created a significant agreement or reached a significant agreement. Sanlam is South Africa's largest non bank financial services group. A separate sends announcement was issued this morning by both firms.

Operator

Upon the conclusion of a framework agreement for this transaction, we decided to inform the market of our intention to avoid unnecessary speculation. Sanlam has appointed 91 as its primary active investment manager. This will entail the transfer of approximately R400 $1,000,000,000, £17,000,000,000 of assets to 91. 91 will gain preferred access to the Sunlands extensive distribution network, which offers a significant opportunity to reach deeper into the South African savings market. Sunlam has also agreed to be an anchor investor in our private and specialist credit strategies.

Operator

The agreement is long term in nature and governs the 1st 15 years of this relationship. In recognition of the value we've received, we intend to issue shares that will result in Sunlam owning 12.3% of 91. From our estimates, this should be earnings accretive since inception. It is important to note that this is subject to shareholder and regulatory approval. We will provide more detailed information in due course.

Operator

Allow me to articulate our rationale for engaging in this agreement. 91 sees this opportunity to bolster its South African market leadership and build on its strong relationship with Sun Long. This gives us access to savings pools outside the normal reach of the 91 brand. Furthermore, this gives us access to seed capital to accelerate the development of the credit platform outside South Africa. Finally, this is a significant vote of confidence in the future of South Africa.

Operator

In spite of the cyclicality inherent in financial markets, our experience is that growth assets under management or growth of assets under management is over time enhanced by market growth. This long term picture is a source of encouragement when times are tough as they have indeed been. Looking back, the great financial crisis of 2,008 appears like a mere blip. The strength of the cyclical headwinds we have faced since the middle of 2022 is often underappreciated. This was largely driven by the rapid exit from the free money era to a world with a normal interest rate structure.

Operator

Over the period, it is also encouraging to note that our staff shareholding has increased to 32%. Our industry faces many structural challenges which are well documented, but also has huge opportunities. The mere scale of our industry with professionally managed assets in excess of $120,000,000,000,000 with revenues of approximately $500,000,000,000 of which the active markets part is well over $200,000,000,000 speaks to the opportunity. AI and technology in general should support significant efficiency gains in future. The world we serve is collectively getting richer and that ultimately drives growth in this industry.

Operator

Markets have been largely positive over the period, but in contrast, business conditions for us have remained challenging. Despite an increase in search activity and client engagements, actual flows of new business in our focus areas have remained subdued. This comment largely relates to cross border investments. The South African domestic conditions also tightened but for different reasons. This was driven by the slow economy, the increased internationalization of the domestic savings portfolios and the introduction of the so called 2 pot system for retirement funds.

Operator

The U. S. Markets continue to set the trend, but market returns have broadened over the period, which points to a better environment for alpha and a stronger case for the diversification of institutional portfolios around the globe. As the world becomes more multipolar, the impact of politics has become more evident. At a global level, markets and economies have been an important battleground for interstate rivalries.

Operator

More recently, the results of the US election has had an impact on markets. As we speak, there is growing uncertainty in respect of trade policy and how the US will engage with established global institutional arrangements. In South Africa, the government of national unity has led to a significant improvement in investor sentiment, resulting in strong performance in financial asset prices. Emerging market performance was strong over the reporting period and actually outperformed the S and P 500. Better market performance has led to positive inflows in actively managed emerging market funds in September.

Operator

This was the 1st positive month for net flows or substantially positive months for net flows for a substantial period of time. But one swallow does not make a summer. But it supports the thesis that we may near or be approaching a turning point. My conclusion is that broader markets, stronger relative emerging market performance and more alpha opportunities in global markets put 91 in a better position to regain momentum than any time since 2022. Conditions have improved but are definitely not back to the old normal yet.

Operator

We therefore remain cautiously optimistic and our strategic actions are aiming to shore up financial strength while underwriting our efforts to grow in our core markets. Assets under management ended the period at 127,400,000,000 on the back of portfolio growth of £6,700,000,000 This was achieved despite sterling strength and net outflows. At the end of the reporting period, sterling has weakened, which is good for our numbers when you look ahead. Fixed income markets performed strongly in dollar terms over the past 12 months with emerging and developed markets performing in line. This is much better than the past 3 years where fixed income returns were largely negative.

Operator

The same can be said for public equity markets with a clear catch up from emerging markets and less dominance from the United States. We have continued to suffer net outflows across the asset class spectrum. The positive flows in our small but growing alternative business are encouraging. The foothold we have established in the fast growing credit markets will start to stand us in good stead in the years to come. We have avoided the game of buying super expensive credit boutiques at the top of the cycle.

Operator

We are building organically based on long term structural demand. Our flow experience has been similar across all client groups, signaling low demand for publicly listed higher risk investments as well as the specific points I raised on the South African market. This is the main challenge facing our business right now. Instead of jumping onto the momentum bandwagon, we are concentrating on building our core offerings and making sure our clients are aware of them and hopefully anticipating changing demand conditions. Investment returns have improved in the short term from the previous year.

Operator

This helps to set us up for and to participate in future flows when they return to the parts of the market in which we operate. Our efforts are focused on improving our relative competitiveness in our core areas and extending our market leadership in South Africa to put us in the best possible position to capitalize on the opportunities when demand returns. At 91, we've always built through the cycle and the past 6 months was no exception. I have discussed the long term agreement with you earlier in the presentation, which I consider to be a significant development. We have involved the entire firm in the AI discussion under the excellent leadership of our Chief Operating Officer, Khadija Basir.

Operator

We have actually offered everyone access to external and internal AI tools to empower our people to enhance productivity and explore new ways of working. This builds on the multiyear process of upgrading our firm wide data management. I look forward to updating you in due course. It's early days, but the AI train is moving fast. We have established 2 new offices in the Middle East, 1 in Riyadh and 1 in Abu Dhabi.

Operator

We are now appropriately staffed in this opportunity rich region. We have been operating here for a long time, but the opportunities at hand and the competitive dynamics now require an expanded presence on the ground. We discussed earlier the significant progress we have made towards our goal of building 1 of the leading emerging market focused credit platforms in the business. Adjacent to this, we have also closed our 1st European Private Equity Private Credit Fund, creating a platform from which we can grow in this market. After the half year end, we have added further experience and strength to our credit platform through well targeted hiring.

Operator

Across the firm, talent, acquisition and management remain a priority. I'm particularly excited at the refreshed and strengthened leadership in our Americas and UK businesses. Ours is a business which should be stable but can never stand still. To remain competitive and relevant, constant investment is requirement required. I now hand over to Kim, our finance director to take you through the financials.

Speaker 1

Thank you, Hendrik, and good morning to you all. I'm here to present another set of robust financial results for the 6 months ended 30 September 2024. I would like to highlight that our core operating business has produced strong results considering the challenging environment. To note, management fees and adjusted operating expenses showed no change to the prior period as results in the core business were held flat. Management fees were at GBP 282,400,000 This is as a result of a slight increase in average AUM from GBP 125,300,000,000 to £126,700,000,000 alongside a slight decline in the average fee rate to 44.5 bps.

Speaker 1

Adjusted operating expenses of £201,900,000 includes the interest expense on our lease liabilities for office premises of £1,800,000 However, the business is showing an adjusted operating profit of £88,600,000 down 9% from the prior period. This delta is as a result of 2 items namely lower performance fees to £7,900,000 again driven by outperformance in 2 key strategies namely EM fixed income and quality and other income of only £200,000 The fall in other income is predominantly an FX loss driven by the strong sterling in the period. Plus, there were fair value adjustments on some seed investments. The adjusted operating profit margin decreased from 32.6 percent to 30.5 percent. 90 1's profit before tax, considering the adjusted net interest income and the share scheme net expense in the period, decreased by 10% to £93,300,000 At the interim, the share scheme is generally a net expense.

Speaker 1

This is largely reflecting the amortization impact from the prior year credits where staff bonuses were allocated to 91 shares. At the year end, we have a better understanding of the share credit and the allocation of staff bonuses to shares. Please remember, we fully expense the bonus payments within adjusted operating expenses, irrespective as to how this is settled. However, IFRS requires us to amortize the share issuance over 4 years, which is then included in the share scheme net expense. The effective tax rate for the period was 26.3%, up from 23.8% last year.

Speaker 1

And the increase was largely driven by the mix of different tax rates in other jurisdictions and now the introduction of the global minimum tax rules. The above factors results in a profit after tax of £68,800,000 and our adjusted EPS shows 11% decline to 7.3p below the 4 in operating profit due to the higher effective tax rate. So this is the analysis of the movement in adjusted operating expenses. Adjusted operating expenses were held flat to £201,900,000 Employee remuneration represents 62 percent of the total expense base. In the prior period, this was 65% and decreased by 4% to £124,600,000 This was primarily driven by a decrease in variable remuneration while fixed remuneration was largely held flat.

Speaker 1

Average headcount over the period was also flat at 1190 employees. Over 50% of employee remuneration remains variable and the resulting compensation ratio was 42.9%. Business expenses increased by 8% to £77,300,000 We've again analyzed the cost changes and at high level we've broken down the movements as follows: inflation linked increases of £1,300,000 for those costs that are impacted by inflation FX linked impact was negligible, which is mainly the USD and ZAR based expenses. There's been a pickup in IT investment of £1,200,000 which will continue as we invest in our front office systems. There have been some one off costs of £2,200,000 which I've extracted to show the underlying cost increase of £1,400,000 The period on period split of these expenses remained relatively unchanged from the prior period and the largest expense remains 3rd party administration.

Speaker 1

I will note all cost categories actually increased in the period. Looking ahead, we're expecting the business expense to be impacted by inflation and the proposed additional IT spend. However, we will try to recoup these increases with tighter cost control elsewhere as evidenced here. So this is showing the business expenses and total expense as a percentage of average AUM in basis points over a 5.5 year period. From this, you can see we continue to maintain cost discipline and achieve a level of operating leverage.

Speaker 1

Total expenses have marginally decreased relative to average AUM. However, business expenses of basis points of average AUM are increasing. This is driven by the cost increases as shown on the previous slide, while the fall in remuneration keeps the overall cost increases in check. So to summarize here, this is the analysis of the absolute movement to the adjusted operating profit from H124 to H125 and it clearly shows that management fees have been flat. The increase in business expenses is offset by a decrease in employee remuneration.

Speaker 1

The decline in our adjusted operating profit has been driven by fall in performance fees and other income as I described earlier. And the capital position at the end of the 6 months, 90 months qualifying capital was £304,000,000 at the end of September 2024. In line with our dividend policy, the Board has proposed an interim dividend of 5.4p, a decline of 8% in line with a fall in adjusted EPS of 11%. After this dividend payout, there'll be an estimated capital surplus of £142,900,000 and this will result in a capital coverage of 227 percent. During the period, we completed another buyback program and this resulted in a return of capital of £11,800,000 and reduction of 7,200,000 shares.

Speaker 1

So noting this capital position, we will with the Board consider future buyback programs. Thank you. I'll now pass back to Henrik.

Operator

Thank you, Kim. Thank you very much, Kim. 91 is clear about its target clients and the markets it can and desires to serve over the long term. The active investment management business requires a long term mindset and it is simply not an option to chase short term momentum. Market positions take a long time to build and should therefore not be vacated during cyclical downturns.

Operator

We will stick to our carefully selected areas of specialization, emerging markets and global specialist equity, emerging markets fixed income, specialist credit, private and public, and sustainable and impact investing. We will continue to compete in the spaces we have chosen and committed to and we will compete where we can win and build leadership positions over time and that includes our original home market South Africa. In conclusion, 91 has been supported by positive markets but experienced disappointing flows for reasons relating to risk appetite and investor demand for most of the areas in which we specialize. We are proud of the fact that we have maintained the underlying levels of profitability and contain costs while funding ambitious investment in future growth. We have organically built a differentiated credit platform that is ready to capture the structural growth that this asset class offers.

Operator

After September, we've seen an improvement in flows and pipeline, which gives us confidence that the worst may be behind us. We are ready to capitalize on the improving momentum. And the people of 91 are aligned and are up for the challenge. Thank you very much. I will now take questions, ladies and gentlemen.

Operator

David, first. Yes, good

Speaker 2

morning. Three from me, please. It's David McCann from Deutsche and Numis. The first one, Henrik, you said in the past many times when you've talked to analysts in the city about, call, I guess, an anti M and A stance that you've had for various reasons, including cultural dilution. So the question really is what's changed your opinion for this particular deal?

Speaker 2

That's the first question. Secondly, recent interview you gave, I think, at the Funds Europe Conference, you said the days of or worse this effect, days of 30% operating margin for the industry were behind you. So what does that imply for the outlook for 91s operating margin going forward would be interesting to hear? And then finally, I guess, a request as much as anything. Your quarterly disclosure, I guess, is now an outlier compared to where others on the market, with Reuters and Aberdeen having changed theirs, the last two bigger ones in the U.

Speaker 2

K. So can you commit to perhaps giving us more detail at the quarterlies around flows and the asset class mix would be useful? Thank you.

Operator

David, thank you. Let me take the last one. I've yet to see the reward for the disclosure in the market, but I think what's important for us is we don't want to turn our investment teams into short term flow driven operators. It is a very important cultural point and therefore of a week I wish I could give you the exact set of challenges or problems or opportunities we face, but it really changes your business inside out. And we will resist that not because we don't want the market to forecast what we do, but because it really has very serious investment management implications and it will chase people to the boutique, unlisted boutiques.

Operator

That's really a simple answer. And I genuinely believe we will give you, as I've done in the past, really appropriate color on the business. And I'm very happy for the market to reward us ex post and not by the prospect. We're not in the business of selling future growth. We're actually in the business of returning capital.

Operator

By the way, we've returned almost 600,000,000 to 570,000,000 of capital since listing to shareholders, which is a substantial part of the initial €1,200,000,000 1,300,000,000 market cap we came to market with. So we don't mind you to wait before you give us any credit for what we do. Secondly, the 30% operating margin question, I was people always say they misquote it, but only part of what I said was quoted. What I said is the days of an automatic 30% operating margin for just showing up is over. You have to be more efficient.

Operator

We have to adapt to a world with ongoing fee pressure, a world where I mean, what we've seen the last 2, 3 years is the competition per mandate. I mean, I flew just after the year and flew to Korea to arrive to to pitch for a very large client and it was there was 91 and 3 and 3 of the other biggest names in the world in a room and there was only going to be 1 or 2 winners. So you've got to really when you get these opportunities, you've got to use them. And so the competitiveness for the active pool has increased. People are really good.

Operator

And so assuming that you will just get a flow because you're somewhere in the pack and not differentiated, I think is something that we've been the advisers on the industry has warned us for years on it. And I think that's playing out. But I don't think if you're a winner, you shouldn't be. I mean, if I look at an example like BlackRock, how they've expanded their operating margin because they've really been a big winner for whatever reason for, you know, they were excellently positioned. So I think 30% operating margin should be plus, should be priced in for winners and the industry is consolidating through brutal competition rather than just through M and A.

Operator

So that's the context. But it's not a given. You can't show up here. And that means people in this business and you look at how our people have have rode in and I want to really commend them for the way they've rode in and accepted that ultimately if you don't get the growth in the flows, earnings will be variable, costs will be tighter. That's just the reality of any maturing industry and that's the context of which I made.

Operator

But this is an industry where the optionality, given the low amount of capital you deploy, the optionality is massive if you win and that is what makes it truly attractive. The question about M and A, I still stick to my religion. I think M and A as such is a very dangerous activity, particularly where you mix cultures. This transaction we've announced today and we like to call it an agreement because Sanlam has been a client of ours for many years and a very substantial client. They raised they came to us and said, this is what we want to do.

Operator

Here's an issue. And I said, well, we're delighted to manage your money, okay, which is our business. You don't get 17,000,000,000 pound mandates going around every day of the week. Troders did the Lloyds. Some of these deals get done on a pure outsource.

Operator

If an outsource is presented to you in a lucrative enough way, whatever technology, whatever people across the chain have to put in some capital to make everyone win. And in this case, what solved for it was an alignment. Now if you do a 15 year contract with someone and it's intended to be multi decade, the best way to lock it in is to make sure there's a shared interest. And therefore, if you can reasonably price that equity and share the interest and lock it in and know that you estimate that it's accretive and that there are benefits outside the income statement, which are actually quite substantial such as supporting some of our private strategies outside South Africa due course, access to completely new markets that we wouldn't have otherwise reached, which are unexploited, unaccounted for, unpriced, then actually one should think about it in commercial terms. But will 91 become a regular issue of equity buying things.

Operator

No, we prefer to build. That's why I tried to explain the credit story to you. That's why I explained, we've built our various equity strategies bottom up with, you know, before this usage of equity, this transit this business has only used 1,000,000 of core capital and actually borrowed everything else. It did an acquisition when it came to the UK. I see Charlie Jacobs in the room, you were the banker.

Operator

It was, if I remember correctly, dollars 80,000,000 We repaid Investec, which lent us the money when we were Investec Asset Management. So we still believe in really being tight on equity, But in this case, what we're talking about is multi decade alignment with the largest non bank financial services business in a market where we aspire to not only maintain but bolster market leadership, and that's what we've done. Thank you.

Speaker 3

Thank you very much. It's Irma Givram from Bank of America here. Just 3 for me, please. So you've had continued good cost discipline. Can you discuss how much flex there is left, particularly on compensation to keep people happy?

Speaker 3

Discuss maybe a little bit of potential turning point moving forward, maybe a little bit more color on where you're seeing more positive signs in the market? And then finally, on the agreement, could you just discuss how it's going to benefit the distribution network and the positive signs you're seeing there?

Operator

Thanks. So it's 3 questions. It's the agreement. The second one is the staff keeping the staff happy. What's the other one?

Operator

Flows. Flows, okay. So the prospective flows. So let me start with the staff one. I think there's limits to that cost discipline.

Operator

You've got to start winning. So we've got to lift our earnings. Our earnings have to turn. What drives our earnings? It's essentially a combination.

Operator

If I look at our history, we sort of in that camp of fifty-fifty, fifty market returns, fifty new business that becomes market return over time with a over time fee pressure, I think we're starting to reach the fee pressure limits in the active management business because what is the fee on the Bitcoin ETF? Anyone of you know? 25 basis points for a proposition which says we're not stealing your money, we're not saying bank when freed, you just give it to us, we may apply no judgment. We just keep your money safe, Right? We're at 44.5.

Operator

Many of our peers are in the thirties. There's a point when that fee is so irrelevant compared to what you pay your private equity firm or someone else that the focus will shift. And that's where I believe as an industry we are approaching that phase, not quite there yet, but we're approaching. But in that context, our people have to be mature, realistic. And if you want to win and you want to charge premium, you have to deliver results and you have to live by those rules.

Operator

And we've inculcated that. I think the kind of people who work here will be tough enough to work through and also because their shareholders will work through these challenges, but there are limits. And we have not seen people go to sort of comfortable jobs yet because most of the comfortable jobs in the active management industry will become uncomfortable if you're not in a winning firm. So I think it's a general, we were lucky by the environment and obviously we are, but we are preaching alignment and you must allow us, not you, but the shareholders that when things go better, we can fulfill the promise that people participate in the success. And I think that's going to be the real test.

Operator

When things better, firms renege on the bargain is we all suffer together but we all benefit when things go well. And I think that is the real test. But I would probably and I think the key thing for us is how do we attract the future pipeline of talent in this business if we are not growing our business and expanding. And that's one of the reasons talking about the Sun Lom arrangement or agreement is fortifying our position in believe it or not, the South African market is incredibly competitive for talent. So the small talent pool, very competitive.

Operator

If you shore up a position and you position yourself as the market leading firm, your ability to attract a pipeline of talent which you develop is better. So I mean that talent was part of the thinking. So talent remains very important. I try to give you an answer, I'm not sure, I can't give you a timeline exactly. That's the first one.

Operator

The distribution reality is that we are 91 is a very institutional driven firm. It has relationship with lots of financial partners, lots of sophisticated funds, etcetera, but it doesn't reach the deep end of the market. This is an opportunity where we reach the deep savings end of the market, which has actually been the growing part of that market. So for us, there's a distribution logic of getting to we're already the leading firm in the upper end IFA market, private banking market, etcetera, if I go away from the pension market. But we haven't we haven't got an own branded reach in there, although we partner with other financial institutions like large banks in the South African market as well.

Operator

So it was just simply an opportunity to access a market which we don't normally or naturally access directly through our brand. We remain fully independent. We do exactly where we've done. Nothing changes on our investment desk, but we're bringing in a few new people who will come from that side, who know their clients, their markets well and will work with us on the investment side. So that's really it.

Operator

And then sorry, my memory again, there was another question. Hubert?

Speaker 3

Discuss potential turnaround or some good signs on

Operator

those kind of areas. Yes. The prospects. And that relates to your first question on talent. I think we are definitely and I just look at our internal metrics and that is we measure pipeline.

Operator

Now you can't convert all your pipeline, but our pipeline has jumped pipeline of real active live opportunities is significantly higher. Whether we will than a year ago and then 6 months ago, whether we will convert that depends on how well we execute at the final at the last mile. And also what we've seen is many clients have, and I've mentioned that to you in the year end presentation, have started the search process. There's huge amount of activity. The actual funding process has still been significantly slower than in the late 2022 period when life was actually pretty bullish for cross border investment.

Operator

So we don't know the answer. All we say is we have more opportunities. We've seen a change. And if I can tell you the numbers of transactions we look at, I can't tell you what is the probability of executing. What I can tell you if you look at our flow experience of the last 4 half yearly periods is we have been we have not converted at the rate that we traditionally did for opportunities.

Operator

So in other words, you get into you've got to have a when you get into finals, you've got to make sure you have at least a 30% chance of winning, not a 20% chance. And then you've got to measure and if you start winning 40%, your net flow shoots up. That's the uncertainty. So we will give you a full report. I can just tell you we're absolutely focused on it.

Operator

And the good thing about 91, we have roughly broadly identified 370 relationships around the world we have to keep happy. I would say probably 200 to 250 of them can really move the dial. That's not a lot. That means you just have to be there. You have to make sure what you do is relevant and what you do is performing for them.

Operator

And I think if their appetite comes back, one will one could win. But there is no guarantee in this business. I wish I could give you a guarantee. But I just feel the experience, the engagement, the indication is that it is not anymore a world which is just a one market world. And I think short term, the Trump presidency or the changes in the U.

Operator

S. Will boost the U. S. But longer term, it is going to make people think and say, should we not diversify from this game? It's not the only game.

Operator

There are other games. And that is really what the 'ninety one business model is predicated on and what we're trying to do is be patient enough, competent enough and absolutely ready. I wouldn't use the, I think as John Irons said, coiled spring. I don't think we're a coiled spring yet, but we want to be a coiled spring at the right point when the market when the demand comes back. And I'm old enough and I've lived around long enough to know demand is cyclical and demand will come back.

Operator

So my best wishes to Hubert. He's not here to ask the difficult questions, but you did a good job. Tell him you did a good job, but anything. Yes, yes. Good morning.

Operator

It's Piers Vran from HSBC. Maybe just two follow ups on Sanlam. I know it's early days in the deal, but can you share any information on what assumptions you've made when you arrive at the accretion comment? We will there's a circular coming. We are very, very constrained by our I see the lawyers are not even here, they're sleeping probably.

Operator

Charlie can tell you, we are so constrained about what we can say and what we can't. What I can tell you, and I think Paul and Rati said that this morning publicly, we spoke to some stakeholders together, I think is that they wanted to put us in a position with this. This wasn't going to strain us because we were collectively solving a client problem. And I think to all our other very important financial platform clients, some of whom are competitors of Sonalan's, nothing changes in their life. And I think Sonalom, which is a large client, was very mindful that we're a small capital light business that can execute well, but needn't be put under extreme financial pressure and therefore that actually is pretty good for us.

Operator

So I'm very confident that we would not have done given our reversion against any kind of share issue. As you see, we've been buying back shares while we were suffering outflows in that, that we would go and do that if it didn't work for us. But I don't want to say trust me, wait for the circular look at it, throw darts, then when it comes out. But it's a it's a it's a sensible mutually beneficial relationship and that's the only way you can conduct long term business, I believe. Can I just ask just on the structure, equity versus cash?

Operator

Obviously, you're quite a large cash surplus. Is there any consideration to They didn't want cash. It's really simple. They have enough cash. So I'll try that one because that would have been easier.

Operator

We could have gone less equity, didn't have to have a shareholder approval. Unfortunately, the value crept up just over that 10% limit, which changes the game. So and then we were so, you know, Calvinist about it that we said we'll ask you shareholders over 5%. I think I remember Charlie telling me once or one of the advisers why why are you doing this? I said, well, we never got to issue equity.

Operator

So in a sense that was you had to accommodate the requirement. And again, I don't understand the life assurance company, but all I know is a hell of a lot more complicated than the asset management business and they had a desire for that, not cash.

Speaker 4

Good morning. It's Rahim Cream from Investec. Just three questions, if I may. You showed some industry data that suggested that net flows had improved in the last 3 months, yet your whole flows in the first half had kind of deteriorated on the previous period. Could you help square that circle and why that implied market share is perhaps ticking down?

Operator

I mean, it's not in market share. I think it was a positive month for active. There's been actually more bit more passive, positive months for active flows. And if our experience on the EM platform was almost to a tee that. So all I was saying is after 12 months of either nothing marginally positive, we never fixed income and equity the same.

Operator

October was okay. I think the November data to date in and I haven't been able to verify, but I was asking market observers and the best way is you call State Street and BlackRock and ask them what their flows are, what are they experiencing. So the EM, there's an assessment post Trump that you just got to think about what or how things are going to get treated. But all I was saying is there was a first time combined active equity and active fixed income positive and a definite decline in the outflow picture. So we as an investment managers, we look at market momentum, we look at things turning and we've also correlated that with higher search activity.

Operator

So that was the point. It wasn't a victory lap year saying, well, we're back in the bull market.

Speaker 4

Thanks. Maybe just longer term in terms of the talk ratio, how does the Sanlan deal impact your kind of 4%? Is it the opportunities in Africa to get up and that's offset potentially by loss with other clients? I mean, how should we think about that?

Operator

I think what it does, it's it shouldn't be it'll enhance the talk, but we've paid for it in a sense. We won't pay I would argue we've got a really good deal, but it'll underwrite the solidity of the book. Remember how we deal with very large accounts. I said 370 down to maybe 200 asset owners and asset platforms, if one of them make a switch or there's a staff change and they change, they can change up in any day of the week a few billion on us, sterling, not rand. And so what you search is longevity and solidity of book with lots of small flows because it enhances the quality of your business.

Operator

So it's a quality enhancer more than a growth driver. What the access to anchor capital does, it unlocks growth opportunities which were very difficult and very expensive to come by. I mean if you go to where we opened 2 offices, you're going to pay a lot of money for that privilege, that long capital that supports you. And of course, we don't want to use our balance sheet because we're fundamentally a capital light business. So I think you should see it in terms of a quality of business, a positioning in a market because once you position yourself as the and we've seen it in the rest of the world.

Operator

I mean, when firms position themselves in leadership positions, they get other benefits including talent benefits. So I think that's where we see it, but there will be a marginal improvement to the talk. But if you look at the volumes of our business, for us, a good, not a talk, but on 100 and which will now be if this deal goes through, 100 and 50 ish, 145, 150 ish asset base, you know, to do 5 to 7 a year, 1,000,000,000 is hard work. And clearly, South Africa is not going to give that for us given the the size of the market compared to the rest of the world. We've got a huge book there that we want to keep, defend, and keep positive.

Operator

We have to win, just like any good sports team, we have to win the away games. We have to win in the North American market. That's where half the money is. So this is really about positioning us that our back is covered, we have the right partners and friends, and we can now go hard to the growth opportunity. And in our industry, it's anyone can tell you that, more than half the action is on the other side of the Atlantic.

Operator

And no matter of fact that we have a fantastic China alpha product, which 5 years ago, I think I told you or 7 years ago, I would have told you that's going to drive our growth. It's not going to drive our growth. We have to drive our growth with the flows that come from the continent which is generating the most wealth and has the most financial wealth available. That's where we've got to win the game or not. And sadly, we have not yet won it and David's going to keep us to account every time.

Operator

But if you win that one, we're going to come back and tell you. But you're right to ask the question and I don't know the answer. All I know is where we have to try and we will do that in a financially sensible way where capital is returned the whole time and you actually will be, it's worth the wait. That is the proposition we give. We give you option value where the cost of my way, it's worth the wait given the fact that capital is returned and that we have solid market where we are.

Operator

And I think we're quite excited now post the United Kingdom. You know, the market has been in massive flux here, massive change. I think we've now finally found a model that will work with a small much smaller number of relationships in a very different way where we can solve their problems and actually find high quality flows that high quality capital allocated to us, which will stay with us for the longer time. And that is really what we're trying to do, and we hope to show you pretty positive answers, but I can't promise anything. I am not allowed to and B, I there's execution risk.

Speaker 4

Thank you. And so maybe finally, on the positive surprises of capital return, how do you think about the buyback in the during the program sorry, how would you think about the buyback during this kind of period where you all haven't completed the deal with Zalem, assume your capital excess will increase even further once that's done? It feels like there's a really good opportunity to accelerate buyback.

Operator

I think we are with you. We just don't believe these are businesses which you should leverage. So we'll buy, we'll use available cash because we don't need to hold the cash because we will actually get a bigger, we'll have a stronger revenue statement, revenue stream to come to us. So that's it. But we are committed as long as the value is correct and we are conservative about that.

Operator

We won't at all cost buyback.

Speaker 5

Thank you. This is Miranda Morishano from JPMorgan. Just two questions from me. You currently disclose, your Middle East footprint within your Asia Pacific client base around 16%. Just wondering whether you could provide a bit more color on where that stands at the moment?

Speaker 5

And also given the 2 offices that you're opening, where you expect that to go forward? Is that going to drive sort of the flow momentum you think?

Operator

Okay. I think Middle East is, in our case, was very targeted large institutional accounts. There's now an expectation that you if you've been to an FII or watched it on YouTube or that, you will notice that there's a huge expectation of doing things there. And so we are by no means unique. Actually, we're reasonably early in getting both offices fully operating, but people like peers and others, HSBC has been there for yonks and years.

Operator

They will tell you that the expectation of being on the ground, being there is just significantly higher than 3, 4, 5 years ago. So this is partly defensive. Then in the United Arab Emirates in particular, we have not covered that region as deeply as we should have. There are with the wealth creation that's happened there, and if you haven't been there, you can't see, it is just enormous. And there's also a lot of foreign wealth being intermediated through that region.

Operator

So it is now really worth being alive and open to the opportunity. I think in Saudi Arabia, it's slightly different because they have been initially spent lots of the foreign reserves, etcetera, they were managing outside and investing. Some of that's been brought back, some of the capital's being used locally. And again, there's an and I don't think it's a market that will necessarily explode upwards, but it's a market which has developed many sophisticated financial institutions. They're very large banks in the region.

Operator

They're very large that will that are could be and are users of our product. But I don't think this is the idea that the Middle East is this sort of a year ago, there was this idea the Middle East is the source of all capital in the world. You just show up there and you get lots of business. No. It's a very competitive place.

Operator

What we're doing is fortifying our business, but preparing for opportunities. And I think we can get some large opportunities, but it will take work. It is not just showing up and getting, but it could be. There's no reason why it couldn't match or exceed what we have in the UK. There's no reason.

Operator

And and and but this is not an uncompetitive place. Everyone in the world is there. And I think the interesting bit someone said to me about the Sanlam arrangement, well, you found capital where no one else was looking for capital, for growth anchor investment for growth business. Everyone's looking for it. They were all looking for it there.

Operator

We look for it. We found it somewhere else. And I think that's the bit that you should understand. But long term, that region is getting richer. That region has a lot of capital.

Operator

The energy story is long from over. And that those dollars have to be recycled in the world, and we want to participate in that.

Speaker 5

Thank you. And secondly, could you provide a bit more color on what you think the tail risk from a Trump presidency would be on emerging markets, especially potential sort of implications in

Operator

the tariff? We have a big debate in the firm, obviously, we've got bulls and bears. I think the disruption on individual companies through the tariff is probably the biggest, so your alpha signature. And then of course, America is powering ahead compared to the rest of the world because it's on steroids. It has had in macroeconomically, it's been overstimulated and the risk is, you know, ultimately, if there's an inflation rise and there's an unexpected, there's some unexpected issues locally and and and confidence.

Operator

Normally, interest rates will bolster the dollar. But if if the if there's a confidence run on the dollar because of the macro policies, of course, the rest of the world's going to attract enormous amounts of capital, whether it's debt or equity and international. One of our biggest strategies is international equity out of the U. S. Is not emerging market only, it's international.

Operator

Right now, international has performed whether it's EM Europe or UK, they've performed roughly the same. But there are some big substantial companies that do well in jurisdictions which will not be prone to the same macro vicissitudes that you may see in a US where its institutional arrangements are abandoned. Now probably another way I should say this on this call, but one of my colleagues, Peter Kent, talks about the EMification of DM. If you start changing institutions that have worked for a long time, there are risks. So I think perversely, the increased risk could be positive.

Operator

Near term, I think it's the US for the US in a world which has to cope with the US. And so I wouldn't go out tomorrow and say, you know, the victory for the rest. It is still, you know, that machine that drives the world, but what I can tell you is technology is distributing around the world. There's maybe, you know, there's all sorts of ecosystems developing in which you can create value. I just get amazed at the companies I meet from Brazil, from Africa, from Asia and what they're achieving and I think any sane investor would want some exposure to those as well.

Operator

And that's the offering we do. If we would have 3,000,000,000,000 shop standing here, I'd really be worried. And we were only international. You know, we're 130,000,000,000 pounds shop. And therefore, we don't concern ourselves that much.

Operator

And we know 4 years is not that long a time. And Trump will add some positives as well. Anything else? Online, yes, Varunie.

Speaker 6

So we've got a few questions. The first step from Brian Thomas at Laurium Capital. I'll start with the first question. Brian passes on his congratulations on the agreement. He'd like to know how this will impact the terms of our relationship our long term relationship with Discovery and Standard Bank.

Operator

Ryan, you should know the answer. Loriam is a very good shop and I'm sure they're competing hard for South African assets and relationships. The answer is nothing. In fact, we of course, if the clients feel different, but we have a very successful relationship with not only those but many other financial institutions in South Africa. We service them each in a way where they can tolerate where it's differentiated and where they can use us to their advantage.

Operator

As long as they can do that, as long as we deliver, they will they will support us but it depends on on on them and these relationships evolve. But we are very proud of our very strong two way partnership with the Standard Bank Group. And similarly with Discovery having been having helped them build Discovery Invest, having huge regard for them, There is no doubt that all these relationships you play your part, but the wider market also gets a part. So we think that nothing will change in the way we control. But as those businesses evolve, they make their choices and we hope they would continue to support 91 as long as we deliver the value they expect from us.

Operator

You know, in our game, we can have it's not like a lawyer. A lawyer can stay with you because he knows you and he draws the contract and you can't measure whether the contract's bad. And fund manager, if you don't deliver over time, the client will say, I want something else or you haven't got the right product or strategy, they will go there and that is that is how it works. But we are very we are very confident that we can conserve us or service or will service all our large clients and large financial institution relationships. The same, all they will ultimately have is a stronger firm that services them and that's in their interest.

Speaker 6

So the next question from Brian, which I'll read out. 91% and Sanlam are both huge players in the savings industry in South Africa. Combining the 2 may mean that some clients end up being over indexed to 91%. How do you safeguard against those Sanlam clients leaving as they already have significant 91 exposure?

Operator

I think that was a very important part of our due diligence. And in fact, Bryan Sanlam doesn't have a very large institutional business. So the over indexing and the overlaps actually not that high. Yes, we know all the clients. They know us but the overlap and we are also bringing in certain, you know, the Sanlam investment professionals across and in certain cases where all we are offering is an environment, a more dedicated investment environment for them to operate in rather than forcing a current 91 strategy onto a new client.

Operator

So we are confident we will be able to retain, you know, as a very high percentage of clients. For us, the area where there wasn't overlap is the big part. The fact that we weren't servicing the Sanlam balance sheet and the fact that we weren't accessing the retail end to the extent we thought we could possibly end. Of course, you know, Sanlam has many pockets, many channels and those were the accretive ones. And on the institutional end, the overlap is actually far smaller than you would think, but we will have to go through a process and respect our clients' wishes.

Speaker 6

The next question from Janet Muzenda from Perpetua Investment Managers. Following the deal with Sanlam, 91 will be an even more dominant player in the South African asset management industry. Can you unpack your views on this and how you consider weigh out the potential pushback from the competition commission?

Operator

Actually, thank you. It's a very good question. We are not that dominant. We are larger than the others. But remember, they often confuse the fact that we and I'm going to use for my colleagues in London here, the rand number.

Operator

When you run R3,000,000,000,000, they think you're very large, but actually only 1 third is really run-in the South African business. So, you know, I'm using rough numbers. That is maybe 50% larger than, you know, 30 between 30 50% larger than the nearest competitors. It's not multiples larger. And actually, we have a distributed range of offerings, not a single range of offerings, which means in each of our market niches, we are large, we are top 3 player, but we're not by any means completely dominant in those.

Operator

We compete very hard. And from a competition's point of view, the South African market remains fragmented and competitive, and we are very clear that we meet the criteria for set out by competition's law. We're comfortable and we will engage. So we will just be a large provider and in many markets, I mean, whether it's in the supermarket business, whether it's in certain manufacturing businesses, the number 1, 2 and 3 have been much bigger market shares than in investment management. In fact, the banking market is more concentrated.

Operator

So I think this is not a concentration issue, but we are very mindful that we don't want to be over owned in certain niches and that's why the rationale of the transaction is not just South African money, there's an international angle to that. And remember, a big part of the South African savings pool is now internationalizing. We have traditionally sold into the upper end our international product and in rest of the market, institutional market, essentially domestic offerings. Now we want to be able to provide, and that's what Sanlam wants, they want our international offering to be to offer a turnkey solution to their customers, which in the case, for example, of a discovery is not the case. They sell BlackRock internationally and us domestically.

Operator

So for us, this is an opportunity to access a large pool of rands becoming dollars that we think we could intermediate and look after better than people who don't understand that market and those clients as well as we do. And that's the opportunity. So for us, there's a big ex South Africa component to this. There is no excess of market share concentration in any market niche. If we combine the 2 together, that should let any authorities or anyone else have a concern about competitive issues.

Speaker 6

The next set of questions is from Murray Moore from EILIT. I'll start with the first. Can the Sanlam AUM leave at any time?

Operator

Yes. I mean, not at any time because part of it, and you'll see in the circular, part of it we're actually acquiring, part of it is what they allocate and it is it is not a simple answer. But, you know, we're talking here about a comprehensive relationship and in certain areas where we have where we contracted hard and the intention is and the under very clear criteria is that this is a long term relationship. But there are certain of the mandates which undoubtedly can leave, whether that is external institutional mandates, whether that is a change in the construct of a Sunland product and that is part of the normal life with large financial institutional relationships because they have to evolve their businesses. And you'll see all the detail in the circular and we will update you how this progresses once it starts, which is a long way off.

Operator

Give my regards to Walter, by the way.

Speaker 6

There's a few other questions from Murray around valuation. The first one, you've paid 1.1 percent of AUM for CIM and you are trading at 0.9%. It looks on the face of it that you are destroying value.

Operator

Very good point, Murray, and good analysis. You should understand why something is 0.9 and something is 1.1 or 1.2, whatever the number is. That, of course, depends on the associated cost And that is done in a transaction. That will be disclosed to you in the circular. We can't talk about it now, but we have done that number.

Speaker 6

Another similar point. You are giving up 12 point 3% of your business trading at £1.62. I would say £1.91 is worth well north of £1.62. So you are giving up more than that. How can you be gaining more value on this SIM deal than you are giving up unless SIM is worth well north of what you are effectively paying at £1.62 share price?

Operator

It's remember, we are not it's not just SIM. It's a relationship and it is a comprehensive relationship we are gaining access to and we have left in our calculations a fair amount of space for that value for the additional value to be unlocked. But we're working with a sophisticated financial counterpart on the other side, and they also can do mass and therefore demanded a fair deal. So I would say but again, we are not in a position now to give you full details. You will see it and you will understand our logic.

Operator

But this was not and I emphasize, this was not a deal initiated by us. This was an opportunity we saw which became a transaction because of the desire of Sanlam because they're a very long term firm and they didn't just want to part with money.

Speaker 6

They're all the questions on Sandlam. So the next, we've got a couple of questions from Tumi Lote from 3061 Asset Management. The first question is, what are your views on the SA Collective Investment Scheme, CIS tax proposals and your thoughts on market impact?

Operator

The answer is I've been busy the last few weeks. I haven't thought about the proposal since they came out. I am concerned about market fragmentation. But I will in other words, you've got to be very careful when you change tax on savings flows. You just got to be very, very careful.

Operator

But I would happily answer that you know, later in the year. I haven't actually thought it through. We had it on our Exco agenda to discuss actually on Monday, but there was something that we had to sign off, which took a bit longer. And, obviously, if you know if you know our Exco is a huge argument about everything. And so we didn't get actually to that tax point.

Operator

So I'm not in a position to give you a sensible answer. My concern in principle is just when you tamper with tax, you never know the unintended consequences of capital flow.

Speaker 6

And Thuy's final question is, what is the timeline on the credit platform? Could you share some color?

Operator

This has been it's a long term story. We've been at it. We are trying to build a leading emerging market and specialist credit platform in both listed and unlisted spaces. Obviously, we're quite big in the emerging market space. We haven't taken private credit far beyond Africa.

Operator

We are doing that now. We actually have a very good partner in Latin America. We're working a long time. We're thinking about ways to package this. A lot of time because there isn't a huge investor demand for emerging markets yet because there's no rate premium.

Operator

But when we start getting the failures of lower quality credits in the developed markets, people will say, oh, hell, we've got to diversify. The people in the UK will understand if you think what happened to Thames Water, etcetera, it was very easy to extend credit when life was good. People will start understanding credit quality. That's where we think the emerging market platform will become interesting. This will provide high quality diverse and risk diversified risk.

Operator

In the European specialist space, we think there are niches from which you can build. The scale is pretty can be pretty substantial. So we have a few billion together in that space. We will start showing you how that AUM builds and how the revenue streams build. What I try to give you a feel of is the various strategy launches we've been putting out in order to build a scale business now in the 91 context, you know, kind of scale is we need to have something over $10,000,000,000 or $15,000,000,000 under management.

Operator

We're a long way off, but we are sensing very, very high demand for this instead of the pure equity demand, which has been muted, which will come. I mean, it's there, but this is an alternative source that we think is quite alternative opportunity, which we think is quite interesting, and we've been very clear. This is the only place where we are going to build in the alternative space. We're not going to buy, we're going to build bottom up, and we're going to use a single platform to which therefore lowers cost to build investment capability and that is what we've tried to do. So I would say driving earnings probably 2 or 3 earnings reports away, but you will see top line growth and you'll see a little bit of extra IUM coming in.

Operator

Thank you very much. Thank you for your patience. It was a long one, but I hope we come back with better flows next time, David. Thank you. Thank you very much.

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Earnings Conference Call
Ninety One Group H1 2025
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