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Edited Transcript of ASHM.L earnings conference call or presentation 14-Feb-19 9:30am GMT

Half Year 2019 Ashmore Group PLC Earnings Presentation

London Feb 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Ashmore Group PLC earnings conference call or presentation Thursday, February 14, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Langhorn Coombs

Ashmore Group PLC - CEO & Executive Director

* Tom Shippey

Ashmore Group PLC - Group Finance Director & Executive Director

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Conference Call Participants

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* Anil Kumar Sharma

Morgan Stanley, Research Division - Equity Analyst

* Arnaud Maurice Andre Giblat

Exane BNP Paribas, Research Division - MD & Research Analyst

* David Leslie McCann

Numis Securities Limited, Research Division - Director & Diversified Financials Analyst

* Gurjit Singh Kambo

JP Morgan Chase & Co, Research Division - Head of Diversified Financials Research

* Haley A Tam

Citigroup Inc, Research Division - MD

* Hubert Lam

BofA Merrill Lynch, Research Division - VP

* Jonathan Richards

Keefe, Bruyette & Woods Limited, Research Division - Analyst

* Michael Joseph Werner

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst

* Paul McGinnis

Shore Capital Group Ltd., Research Division - Research Analyst

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Presentation

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [1]

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Thank you very much for coming. Good morning. We're going to give you the half year results for Ashmore to 31st of December, 2018. Normal format. I say a little bit. Tom says a huge amount and does all the work. So let us -- let me start this off.

We're pretty happy really with where the business is. I mean, obviously, we can always be better. But investment performance is exactly as we would expect. We've got that 3-year outperformance that we like. We had a nice, soft market, frankly, in the back end of last year. So that enabled us to put some risk on the prices we liked across fixed income and equities. So we're feeling pretty good. So we feel very confident about where we are because our performance is what we want it to be but also because clients are being a bit more resilient than usual.

Normally after bad headlines -- everyone's a headline [leader]. Normally after bad headlines, you can think that we get a bit nervous. But as you see from our numbers, we still had net inflow in the half -- first half, which is the second calendar half of '18. So 10% asset under management growth year-on-year is fine. It's always nice to have 15%, but it's fine. We're happy with that. Management fee income grew, as you'd expect around that. EBITDA growth, adjusted grows as well despite lower performance fees. Tom will take you into the detail on that. And then in terms of divis, we're maintaining them. There's no reason to do anything dramatic; it's the half year.

And then from here, we feel pretty good about the outlook, actually, or I do. I feel pretty good. EM are in relatively good health. The problem -- EM countries are kind of getting support where they're making sense. The problems in themselves create values. So that, we think, gives us some nice opportunities from here for the next 6 to 12 months. Capital inflows are continuing. GDP growth is pretty good, and inflation is pretty much protected in most countries. We think the dollar will continue to weaken from here. All those support things that have happened are kind of drifting off. And we -- the year feels -- has started pretty well for us. The trouble is there's another 11 months to go. But so far, the year started pretty well for us. So we are feeling pretty good about life, actually. The business is doing what it should do.

I think I'll hand over to you here, Tom.

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Tom Shippey, Ashmore Group PLC - Group Finance Director & Executive Director [2]

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So as Mark says, while market conditions were more volatile in 2018, the business model delivered good growth and decent operational and financial performance.

Over the period, assets under management rose to $76.7 billion, 10% higher than 12 months ago through a combination of continued net inflows and positive investment performance. Average AuM was 17% higher than the year previously. This high level of AuM delivered an 8% increase in operating revenues to GBP 148.2 million, comprising 18% growth in net management fees to GBP 142.3 million and GBP 5.9 million of performance fee income and other revenues.

While the market backdrop has been more challenging, Ashmore's focus on operational efficiency was maintained, meaning the like-for-like cost base -- cost increase was only 2%, and adjusted operating cost increased by 8%, delivering an adjusted EBITDA margin of 67% and adjusted EBITDA of GBP 98.8 million, up GBP 7.6 million or 8%. This operating result delivered GBP 84.9 million of cash flow. Reflecting the year-on-year impact of slightly weaker sterling, a lower level of performance fees and the negative effect of marking to market the group seed capital positions at the period end. Reported profit before tax was GBP 93 million, 6% lower. And diluted earnings per share was 10.1p, 10% lower on the prior year. Taking into account the improved operating performance but recognizing the reduction in statutory earnings, the board declared an interim dividend of 4.55p per share, in line with the prior year level.

Now before getting into the detail of the financial results for the half, it's worth looking quickly at the characteristics of our long-standing business model, how these enable Ashmore to deliver through the cycle and provide the ability to take a longer-term strategic view.

The group's revenues are driven by a range of high-quality, diversified management fees, which are recurring in nature and represent more than 90% of total fee income. While 14% of the group's AuM can deliver performance fee, the financial model is not reliant on this particular revenue source.

In an inherently cyclical business, cost flexibility is key. Ashmore has an unrelenting focus on controlling its fixed costs. And the profit base equity bias variable remuneration model ensures that employees are aligned with shareholders, protecting profitability in weaker parts of the cycle. The cap on the bonus pool of 25% of profit also ensures that shareholders enjoy the rewards in more favorable times. Ashmore's team-based approach to investment management, combined with all employees earning equity, contains a -- creates a distinctive and collaborative culture that reduces the reliance on any one individual and achieves stability.

The business model delivers an EBITDA margin that is high by industry standards and converts these profits consistently into cash. This helps sustain the strong, liquid balance sheet that provides the group with significant, strategic and commercial advantages such as supporting AuM growth through the seed capital program. I've talked before about how this model performed through the down cycle of 2013 to early '16. And now 3 years into the emerging markets' recovery, it can be seen that the model also delivers on the upside. Since December '15, assets under management have increased 55%, driving management fee growth of 44% and expanding EBITDA margin from 62% to 67%. The 44% increase in EBITDA over the period has generated operating cash flows of GBP 435 million, from which approximately GBP 350 million has been returned to shareholders through dividends. Our view is that the current EM cycle has further to run, both in terms of market outperformance and investor allocations, and the model will continue to deliver value to clients and shareholders. Equally importantly, when the next downturn inevitably comes, we have confidence that the model will deliver as it has done over 25 years-plus of our history.

Now looking in detail at the development of AuM over the 6 months. Respectable levels of gross and net flows were delivered. Gross flows were $8.5 billion; and net flows, $2.4 billion, while investment performance was positive. In aggregate, assets under management increased 4% over the 6 months.

In terms of client activity, there was a bias to the first quarter, which delivered $1.9 billion of net inflows compared with $0.5 billion in the quieter second quarter. There were a number of reasons for this: the U.S. midterm elections; the cumulative effect of the more volatile global market conditions, which had existed from April onwards; and the approaching calendar year-end meant the institutional allocators seem to adopt more of a wait-and-see approach. Compared with the prior year period, both gross subscription levels and gross redemption levels were lower.

There's notable trends in the net flows pattern. Firstly, the majority of the net flow came from existing clients, adding to mandates or topping up, in line with the trend we are seeing to increase allocations over time. Secondly, new mandates, which represents about 8% of the total -- sorry, 10% of the total, were predominantly into local currently -- currency, blended debt and the equities themes, consistent with the client demands seen earlier in the year. And thirdly, the momentum we've experienced in the intermediary-led business in the previous 12 months has continued, with over 20% of the net flows coming from the intermediary channels in Asia, Europe and, increasingly, the U.S. In total, intermediary-sourced AuM remained approximately 14% of the overall assets. Other than this continued strength in the intermediary business, there was no particular bias in terms of client type or client geography, meaning there's limited change to the balance of the group's client base.

Turning now to revenues. Net management fees increased 18% to GBP 142.3 million, largely reflecting the level of higher AuM as client allocations increased. The net management fee margin for the period was 49 basis points, slightly higher than the 6-month period to June, reflecting the retail inflows and also the impact of the Ashmore-Avenida acquisition, which was completed in mid-July. Consistent with the longer-term trend of larger mandates reducing average revenue margins, the net revenue margin reduced by a basis point on the prior year period. Product mix effects in these 6 months were negligible. The foreign exchange impact was positive in the half, with the dollar being approximately 3% stronger and, therefore, having a beneficial impact on the sterling value of reported management fees. Performance fees for the half were GBP 1.2 million, and therefore, my guidance for the full year remains at the bottom end of the up to GBP 10 million range that I set out in September.

The efficiency of the business model is demonstrated by our continued control of operating costs. First, even in a period of strong operational growth, like-for-like nonvariable comp costs increased by only GBP 0.5 million or 2%, the majority of which was due to the impact of weaker sterling on the reported numbers. Secondly, the business model has successfully absorbed the impact of regulatory change such as MiFID 2, the opening of an office in Ireland in preparation for Brexit and the successful integration of Ashmore-Avenida in the period. Therefore, total costs before VC grew by 8%, in line with the total revenue growth and well below the 18% growth in net management fees. While the investments made in Ireland and Ashmore-Avenida have led to an increase in costs, both initiatives will make a positive contribution to the group's net profits this year.

Average headcount increased by 15% to 294, predominantly the result of Ashmore-Avenida's 42 employees. Fixed salaries, however, increased by only 8%, reflecting the nature of the acquisition, and in particular the fact that 19 out of the 42 employees are involved in project-level activities rather than investment management. At the group level, 281 of the 300 employees are in Investment Management roles. Usually, at the half year stage, variable compensation has been accrued at 20% of prebonus profits. This means that total cost growth was also 8%, in line with revenues.

Now looking to the second half of the financial year. Our focus on maintaining cost discipline will continue. I would, therefore, expect limited increase versus the first half's non-VC cost run rate of GBP 28 million.

Now the accounting presentation of the group's seed capital adds complexity to statutory results, and so here, I'll summarize the main P&L account lines that are affected. The headlines are that the active management of our seed capital investments has generated a pretax gain of GBP 1 million in the period, and weaker market conditions towards the period-end delivered an unrealized net mark-to-market loss of GBP 9.7 million. With 30% of the seed capital held in equity and a relatively weak performance of global equity markets over the 6 months, the bulk of this unrealized mark-to-market effect was concentrated in the equities exposure. Now while we're only 6 months into the current 2019 year, emerging markets have started strongly, as Mark commented. And therefore, as of today, the bulk of this mark-to-market impacts has been reversed.

Now looking at the statutory results. The group delivered profit before tax of GBP 93 million. While the operational results in the 6 months was strong, the GBP 20 million swing in unrealized mark-to-market seed capital gains or losses means that pretax profits as reported was 6% lower than in the prior year period. The group's effective tax rate for the 6 months was 20.4%, a little higher than the group -- than the U.K. statutory rate of 19% and due to the seed capital losses being disallowable for tax. Excluding this impact, the underlying rate was 19.7%, still a touch higher than the U.K. rate, largely as a consequence of profits earned in overseas jurisdictions that have higher corporation tax rates, such as the U.S., Indonesia and Colombia. Two factors will lower the group's effective tax rate going forward. Firstly, the U.K. rate is expected to fall to 18% from 2020. And secondly, the establishment of the office in Ireland means that some of the group's revenues will attract a lower effective tax rate than the U.K. rate. Therefore, based on today's geographic mix, a reasonable estimate of the group's medium-term effective tax rate will be in the range of 16% to 18%.

Diluted earnings per share of 10.1p was 10% lower than in the prior year period, and the combined impact of FX and seed capital was negative 0.8p. Excluding the impact of FX and seed capital, an adjusted EPS of 10.9p was recorded, up 6% on the prior year. Now consistent with the board's desire to achieve dividend cover of at least 1.5x, the interim dividend has been maintained at 4.55p per share.

Turning now to the cash flow. The group's operating model is structured to efficiently convert profits to cash. In the 6 months period, the group generated GBP 84.9 million of cash flow from operations, representing 86% of adjusted EBITDA. The group paid GBP 13.8 million of tax; distributed GBP 86.5 million to shareholders, roughly equivalent to the operating cash flow generated; bought GBP 22 million worth of shares into the EBT to mitigate the dilutive impact of share awards; and redeemed the net GBP 16 million from the seed capital program. Approximately GBP 5 million was spent on the Ashmore-Avenida acquisition. Allowing for interest received and positive FX effects, the group's cash resources in December were GBP 416 million, 2.5% lower than the start of the period.

In terms of the seed capital program, we continued to deploy the group's capital resources to develop revenue streams. At the period-end, the market value of the group's seed capital investments was GBP 213.4 million, a decrease of GBP 15 million. Undrawn commitments totaled GBP 24.9 million, taking the total of both invested and committed to GBP 238 million. During the period, new investments totaling nearly GBP 31 million were made, notably in the alternatives theme and in support of growth initiatives in local market businesses, such as Indonesia. Recycling activity was concentrated again in alternatives as certain funds returned capital to investors, including back to the group.

As I explained earlier in the presentation, the seed capital program had a negative mark-to-market effect on the P&L this half. While the reported returns in any given period will reflect the prevailing market conditions, the actively managed program aims to realize a profit when capital is recycled. Over the past decade, more than GBP 50 million worth of positive returns have been realized. However, more importantly, seeding has supported funds that today manage in excess of $11 billion and represent 15% of the group's total assets under management. This demonstrates the program is an effective and value-creating use of the group's capital resources. We continue to find attractive opportunities to deploy our seed capital. And subject to the market, I expect the overall commitment to fluctuate somewhere between the current level of around GBP 250 million and approximately GBP 300 million.

Lastly then for me, a quick recap on the balance sheet, which continues to be well capitalized and highly liquid, characteristics that provide significant, strategic and commercial benefits. Ashmore's total financial resources increased from GBP 599 million to GBP 643 million over the 6 months. Based on the Pillar 2 regulatory capital requirement of GBP 119.5 million, the group has excess capital of GBP 523.7 million, equivalent to 73p per share. IFRS 16 will be adopted for the group's 2020 financial year. I estimate that the revised accounting treatment for the group's operating leases will not have a material impact on the group's regulatory capital position.

The group's financial resources, as I say, remain highly liquid. GBP 416 million pounds is in cash, and approximately half of the seed capital is invested in funds with better than 1 month liquidity terms. Balance sheet FX exposure continues to be biased towards the U.S. dollar. At the period-end, almost 2/3 of the group's financial resources were denominated in the U.S. dollar cash or U.S. dollar seed capital positions. Consequently, USD a 0.05 move in the key U.S. dollar to sterling rate implies a profit before tax impact of GBP 3.5 million. This sensitivity is lower than at the start of the period, reflecting the actions that we have taken to realize gains when the dollar strengthened against sterling over the half.

That's it for me.

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [3]

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So yes, I'm going to touch on a couple of things, as usual, around performance. So this gives you the typical thing that we show, which is 1, 3 and 5 and by the major themes. It sucks in global product and local market product. We sometimes can skew things a little bit. But it's a good snapshot, and it's consistent with what we've done before.

So 3- and 5-year numbers are in the 90s across the piece as the group, which is great. One year is at about 30%, which isn't great but is great because we've just done what we always do. So in the last 6 months of last calendar year, we, as I said to you before, our acquired risk at levels we're very, very comfortable with in all product. And we would expect that would give us short-term outperformance to add to our long-term outperformance over the next 12. So we're feeling pretty good about it, actually. And the client reaction is good, too. I think maybe people have kind of finally got used to us. So that's good. We -- yes, I think there's a point here, which is kind of -- I always think is a little bit of an excuse. Approximately 50% of underperforming AuM is within 50 basis points the benchmark, yes, but it's a measure. So we think we'll be able to see this change quite a lot in the next time we talk to you.

So outlook for EM after performance. 2018 was due to a lot of different things. There were some particular country issues in places like Argentina or in Turkey. There were some dramas around trade wars or not. Brexit, fortunately, in terms of what happens in EM, is relatively irrelevant. It can pop up occasionally but not really. [Suffered] in terms of the U.S., dramas in terms of U.S. political governance, et cetera. So we look at the fundamentals. And clients do, too, I think. So GDP growth is high in EM. It's getting faster. They're kind of bouncing back from their adjustments where they had to make adjustments after -- during and after the QE process. Certainly against developed markets, growth is high.

Inflation is pretty low in most places. There are some notable exceptions, but pretty low. And central banks are really doing the right thing in terms of managing that kind of thing. We've just been through a big election year. There were lots of elections in '18. There's a couple more in the first half of this year. But a lot of elections tends to create uncertainty, which tends to create asset sell off, which tends to create opportunity if you think more than 2 minutes out, and we do. So, both in fixed income and equity, we think we've had a really good last 3 or 4 months in terms of what we were doing in terms of positioning. So we're feeling pretty good about all that.

The asset classes are pretty well attractive in terms of valuation. Capital flows, yes, as I mentioned earlier, we have net inflows up until the end of December, which is a good thing, given that it was kind of a medium year in terms of overall investment performance for most investors in all markets. The people [slummed] away on what we do, so we quite like that.

Main risks. Well, China-U. S. rhetoric is a risk, right? So actuality is also a risk in terms of what actually happens. And at the minute, any kind of a trade restriction reduces global growth. If it's a small amount, does it make a huge difference? Perhaps not. If it's a large amount, it might make more of a difference. But at the margin, it's not a great thing, but every market has it. And for EM, it's less dramatic than some. The dollar has been very well supported through some technicals, particularly the big tax giveaway in the U.S. and the sort of amnesty in terms of bringing cash back. But other issues, too. That dollar support, that sort of, if you like, petroleum fuel charge is kind of drifting off. There are lots of good things going on for us. As I mentioned, there's still another few elections. There's plenty of noise and drama that we can take advantage of, and we're looking forward to that. And we think DM is much more risky, frankly. I mean, look at the shambles here. So at least, as we've always said, EM is a market we can define as one where risk is properly priced, and DM is the opposite. So that's just kind of natural Ashmore sales pitch, but we believe it's true.

I'm going to summarize in a minute, but I've been asked to comment on my rationale why the company has announced something today vis-a-vis me, because we thought it would be a good thing to talk to you about. For me, this is business as usual. The reason we're doing this, there are kind of 3 or 4 reasons. I'm sure a lot of you are aware of the Rule 9 rule, which is a rule that says, for anybody that owns more than 29.99% of a company, if they own anything else, they have to make a bid for the whole company. Now I technically own about 39% and have -- when we weren't public, I owned 43%, which is, whatever it is, 13 years ago. And the difference is basically through gifts to charity. I'll get on to that in a minute.

As a company, we, from time to time, want to buy back capital. And we want to do that in the market, and we use the cash that we have on the balance sheet from time to time. And we want the flexibility to do it. If there's a meltdown, we tend to do it. We did it last time there was a meltdown. If we exercise -- if we do that, we're not allowed to do that under Rule 9 because buying a single share would increase my pro-rata holding, and I would have to make a bid for the company. So we have to get a Rule 9 waiver every year at the AGM, and we've got it. It's interesting because we get it despite the fact that I can't vote, so I'm out of the vote. So it's a percent -- much smaller percentage of the company voting. I can vote, but nobody cares. And so we've got that time after time. But what's been happening with the sort of general proxy adviser corporate governance thing has been a huge amount of box ticking. And no matter how many times we explain to people that I have no intention of seeking creeping control and not trying to find a way around the rules, it's created increasing negative noise. And I had a particular meeting in the back end of last year, which I thought, "Okay, this is beginning to be a damn nuisance." You can blow it off and, say, their idiots, whatever. But I try not to do that because they're very talented people, and they're protecting shareholders generally. But in our case, it was kind of not really understood.

I had a meeting with a pitch for a client, and the very first thing they said, because the investment association publication had been in the press the day before, that we were repeat offenders because we had more than a certain percentage vote against Rule 9 even though it was voted through, the Rule 9 waiver. I thought, "Yes." They asked me, and we spent 5 minutes on it, 10 minutes on it. This is ridiculous. So I had to do what I'm doing now with a potential client, and I thought, "Yes, this is beginning to be a drag." So my big mantra in life is that I'm trying to build shareholder value in this company for all of us, for me and everybody else, and I'm planning to continue doing that for a very long period of time. So it has been a bit of a nuisance.

The second thing that Rule 9 has effectively done is I get paid like everybody else, which means in shares and cash. So every time I get a bonus, I have to sell stocks as I don't increase my weighting. And I've never sold in the market because I didn't really want to sell. What I've done is I've gifted to charity. So basically, I have been working for charity, said nicely. For a while? Of course, not. Of course, there's dividends and everything else. But so -- and that's all fine, and I may still do that. But I just thought it made sense that if I can deal with the shareholding issue, then I can be like everybody else, and there's no real drama. So the Rule 9 thing was kind of those 2 points a part of the rationale.

The third point, sitting there thinking about it and discussing it with the board is, look, yes, I'm in my mid- to late 50s, said generously. And will I be doing this in 10, 15 years? Unlikely. But do I want to stop doing it now? Absolutely not. I love this gig. So what can we do that gives ourself -- gives everybody some comfort about what's going on and, perhaps, fix this proxy problem as well, this proxy adviser problem? So I think it's prudent. But I would do, I guess, to sort of let people know, look, I'm not going to sell a whole lot of shares in a hurry. I may not sell even up to 4%. It's up to 4%. So I may sell less than that. We'll see. But there is a plan to address the issue over time, first, the proxy adviser issue but also the overhang issue. And yesterday, I could have sold 39% in the company, hit the market with it. Ciao. Today, I can't. I said no more than 4% a year. So it's actually, I think I would, but I think this is extremely positive for shareholders and the market. It's like, "Oh, okay, voluntary cap on possible sales." We've got daily turnover now. That's getting quite large. There should be no issue. And I'm in no rush, believe me. No rush. Sold nothing today, no plans. And then finally, it will increase liquidity gradually, which everybody tells me is a good thing. And that's a nice, additional benefit and good because we get a broader shareholder base. But that's the rationale. So we can take questions afterwards, but I just thought I'd share that with you because I want you guys to get -- understand it. Because if you guys understand it, there's a chance other shareholders will understand it. Only a chance, but I've got a conduit, and you're it.

Then, in summary then in terms of the business -- and the whole me thing is business as usual. So as far as I'm concerned, that is that and is dealt with, and people can forget about it over the next 10 years. It's just -- and they'll see what happens, and they'll see it's not some kind of crazy desire to exit. I love this business. I want to keep doing it. I have no intention of retiring in the near future. Zero.

So then to the business. Investment performance is still good. We're particularly pleased with where we are in terms of being able to acquire risk back end of the year. Our assets are still growing despite negative headlines from time to time. Client flows have been pretty resilient, partly, I think, because we've changed the product mix. Over the years, we've evolved. And the product mix, yes, you can buy us when you're kind of a bull on what's happening in EM. Great. You can buy the products. You can buy the stock for that. But increasingly, we've designed product that gives people different flavors of that. So there is a chance to do less aggressive things where you can still -- less volatile performance in down markets. And we do that, and we continue to do more of that. So I think that might be part of it, but I like to think that. And then in the next meltdown, everybody might sell as well. So let's not take that to the bank.

EBITDA adjusted is fine, growing 8%. Cash is fine. The outlook feels pretty good for us. I mean, we like this resilient client flow thing. We set ourselves up, we think, quite well again for performance. Emerging markets are doing pretty well, generally. There are some ugly ones, but the ugly ones probably give us real opportunities around regime change. So that's good. Dollar, I don't think, is a straight up from here. I think it's weakening as a currency. And there's still more election action. So we feel pretty good about the business today. It feels pretty good.

I think that's the end of my little speech. We're happy to take questions.

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Questions and Answers

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Anil Kumar Sharma, Morgan Stanley, Research Division - Equity Analyst [1]

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Anil Sharma, Morgan Stanley. Just 2 questions, please. Just curious as to -- on the sort of Rule 9 and the shares out there, why or how the board decided on a gradual sell-down per annum, versus say, like a placing, which arguably would remove some of the overhang a bit sooner. And then just one more on the business in terms of the assets base. We can see America's got a lot bigger now, 25% of the assets. Is that the piece, which is a bit more [through the 40 Act] in retail? So I noticed in Tom's remarks, you were sort of saying it's usual allocated as you're quite comfortable with in their outlook. But on the retail side, is that a bit where maybe that's going to be a bit of pressure?

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [2]

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Yes, sure. So dealing with the first point first, logically. I'm not really keen to be a seller. This is not like, "Oh, I want to sell." This is not a desire to get out of the stock and out of the company. So there's a trade-off between me not wanting to sell shares and trying to deal with the issues and have a very long term and prudent plan for the company. So I'd rather do that now and have a gradualist approach than say, "Ciao. Take something off the table. Fix it in a hurry." And that is a balance. You are absolutely right. We're going to have probably slightly less irritating conversations with proxy advisers that we hope will get us to where we want to get and take some of the heat off, but it will be seen to be a move in the right direction. Plus it fits with what I want, which is not to ditch the stock, and it's not what I'm interested in doing. That's the first thing. The second question, yes, we've had a bit of progress in U.S. retail. We've been trying to do that for a while. That would change the resources around a little bit there. It's -- we're getting a bit of process. U.S. retail market is going through a bit of an angsty phase, as you know. Because, basically, everybody's buying passive. And active managers in U.S. retail haven't really done very well. So they're all having kind of mental meltdowns, all the active managers. But we have alpha, and that does still sell in U.S. retail. So yes, we're seeing continued demand there. And that is inching up as a percentage of assets, which is while the assets is also going up, is a good thing. So yes, it's getting more important, more penetration. We're pleased with it, but not yet delirious. But we're -- it's getting bigger.

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Jonathan Richards, Keefe, Bruyette & Woods Limited, Research Division - Analyst [3]

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Two quick questions from me, both on strategic in nature. Firstly, can you just talk a little bit about your sort of push to have assets flow, be more EM to EM and how that's evolving? Has the sort of the temper tantrum that's come out of the U.S. helped that push at all happen, especially thinking about maybe some large Asian countries minding to be wanting to diversify away from U.S. exposure? That's the first one. And then secondly on -- you talked about asset mix. Could you just talk a little bit about the equities business? It seems to be underperforming vis-a-vis some of the other strategies. What's your long-term strategy there? How do you think about the right size of that business within the mix of your other products, et cetera? Jonathan Richards from KBW.

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [4]

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Okay. Thanks. Okay, I'll start with the equities piece. Look, we want it to be a much larger part of the business. We have now got 3 or 4 strategies that are all outperforming, which is great in the global business. We're now beginning to see some traction there, so we're starting to see flow action. We've got the product set, the flow. The products that have outperformed for a while, we've now got in the right products to raise retail money as well as institutional money. So we think that we will make gradual progress there. Within the local businesses, we're making good progress, I think, with the assets. So we think that will work out. It's all about performance, and then by getting the message out. We now have -- within the right products this year, we go through a year performance in all of them. And we have longer performance than that. But in the right product, not yet. So we -- believe me, we -- this is a conversation I have with the sales team a lot. This stuff should be selling out. So it is starting to, so it's a big push for us. As a percentage of assets, it's a guess, right? I mean, I'd love to have a perfectly balanced businesses with 50% equity, 50% fixed income. And maybe, I'll get there in 6, 8 years' time. But we're very happy to have more of it because we like balance. It's a good thing. That's the equities piece. And then in terms of the EM to EM flow, I guess there's 2 components to that. We think a lot about within EM flow. So the reason we have in our strategy local asset management companies is as EM gets more -- as countries get more wealthy and demographies get more wealthy, the larger ones, we want to be able to help that happen. And that's why we're set up and having some success in countries like Indonesia, growing our asset base. EM to EM, I think about -- just about 40% of our money now is from EM sources, which is interesting. So there is already -- we were already capturing some of that. In terms of the Asian side of things, yes, that's a big part of it. Interestingly, DM to EM, there's also a much larger drive to get out of just U.S. and European assets from Asia. So Asian DM is also going, "Wait, how should I look? I need some returns on my asset base." So I think there is a general how much American risk do we want. We're all happy to have the bull running in equity. But how do we stay going forward in treasuries? So that's definitely on the agenda. And that trend, I think, is positive for us. How do we capture it? We'd talk. We're pretty clear who we'd talk to. And as Tom said before, we have a pretty good institutional client base now. For them, it's more a question of not messing it up, performing for them, and the flow comes once you get the client. We have a pretty good client set institutionally in Asia now. We could always do better, but pretty good.

Lady over there.

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Haley A Tam, Citigroup Inc, Research Division - MD [5]

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It's Haley Tam from Citi. Kind of 2 questions, please. First of all, on retail flows. I think it was 20% of the flows in the half year. And I seem to recall, it might have been something like 25% the previous period. So wonder if you could talk about that momentum. And any color on where the capital flows have been year-to-date in terms of institutional versus retail? Secondly, just on Avenida. I know it's a small acquisition, $300 million of AuM. It's obviously increased your headcount by about 20%, but your fixed staff costs by only 7%, so could you talk to us a little about how we should think about, say, your variable comp modeling going forward and then the costs generally?

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [6]

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Yes. We can do -- I'll let you do most of that one, except I'll just say, it immediately depends how expensive people are on what they're doing. So yes, so different people cost different things in different markets. And local businesses have their own variable comp models that sit within the whole. So they have their own thing. But Tom will comment about that. Then in terms of flow in retail, I think it's what it probably is. It's just we've had some large institutional acquisitions of assets in the last period. I can be -- it can just be like that. Retail flows continue to grow. I think it's just a percentage of -- it's just denomination of the effect, really. Do you want to add anything, Tom, and answer the rest of that?

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Tom Shippey, Ashmore Group PLC - Group Finance Director & Executive Director [7]

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I think what I said in the past is 20% to 25%, so it's not an observable shift in momentum in the retail business. It's hopefully came across that has continued in the 6 months pretty well. On the Avenida side, just to expand a little bit on what Mark said. The 40-or-so employees that we acquired, if you like, in July, they were split or they are split between people that we would think of being in investment management. And those, in some ways, have hard hats and still took up some runaround on building sites. So there's 2 different categories. And clearly, to Mark's point around costs, they are, first and foremost, in the local businesses in Colombia. So they're likely to be less expensive than people in EC2. But also, that mix of individual means that certainly the project management staff will also be less expensive than the investment management people. So it's split it into 2 category. We have, as I mentioned, integrated the business. It's relatively small, but we've moved their New York finance risk management team into our Manhattan office. So we've got rid of their infrastructure in New York. We're co-locating next month in Bogotá as well. So we're taking out some costs that have been in the Avenida cost base hitherto. In terms of the overall comps structure, it's similar at the highest level, in that there's a percentage of pretax prebonus that goes into local pool, which then, through accounting, all gets consolidated up and sits within our up to 25% pool. So it will -- at the group level, you can still model it from the 20%, 21%, 19%.

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Michael Joseph Werner, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst [8]

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Mike Werner from UBS. Two questions. You noted how most of the flows were coming from existing clients. I guess, do you guys struggle as a firm to win over new clients? Just because I can imagine it's easier for some of the more diversified asset managers who may already have relationships with those clients to potentially sell an EM debt or any EM equity product into the client base. And if that's the case, how are you addressing that? And then second, getting back to kind of the potential share sales that you had mentioned. Again, as conduits, I've already heard questions from shareholders about how this may manifest itself in the coming years. Have you guys thought about that? And is there any information you can provide there?

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [9]

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Just in terms of the new client-old client thing, it separates a bit. So in retail, I think it's more new client. So it's more intermediaries that we may or may not have been on platforms, with products getting on platforms and finding new clients. So it's more new clients in retail. So the retail piece, they may be the same intermediary, but the people buying it are from somewhat different than they bought it last time. So in retail, I think it's mostly new client. In terms of the institutional business, I mean, just in terms of just mathematics, as we get more institutional clients, it tends to be coming from them more as they top up and as they want to grow. We do still get new client base. I think depending on where you are, you get real client biases to go different ways. So in Asia, if you do a good job for them, they probably want you to sell them multiple product because it's just easier for them. In certain other places where they have a lot of people who like to think about these things, so like the U.S. foundation endowment market, that's the last thing they want to do because they think that everybody must be good at one thing. So how we handle it is we try and get close to the client and sell them more than one thing. It takes a while. I mean, you need a good relationship, particularly the bigger clients. You need -- so for example, equities is a very good example on this. So we've got numbers that are pretty good now in the main equity strategies. In fact, very good in one of them. And just getting that -- getting -- selling it to existing clients, you got to get to the equity guys, the equity team, the equity consultants. And you got to do that in a coherent manner. You're going to do it through a product they understand, and it just takes time. But we have made some good progress there, and I'm pleased with it. So I think we're -- I'm hoping that this year, we'll see some moves there. So I think that's kind of how -- does that answer the question?

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Michael Joseph Werner, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst [10]

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Yes, it does.

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [11]

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Was there another question?

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Michael Joseph Werner, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst [12]

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Yes. And the second question just in terms of the mechanics.

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [13]

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Oh, the mechanics of that? We have thought about it. What's happened to us from time to time, as people have come to us and said, "We'd like to buy stock," that may happen again, and that would obviously be easy because it wouldn't trouble the market in terms of lots of individual trades. There's no desire to do a large amount anyway right now, so it shouldn't be something that's particularly challenging for the market. But I think that's probably about as much as I can say. Is there anything else I can say? Yes.

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Hubert Lam, BofA Merrill Lynch, Research Division - VP [14]

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It's Hubert Lam from Bank of America Merrill Lynch. A couple of questions. Firstly, going back to the old client question. It seems like they've been topping up quite aggressively over the last year or so. I'm just wondering how far you think they are from benchmark now and how less underweight are they.

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [15]

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There's a real range. So the really big developed market allocators are quite a long way away. Some of the smaller pension funds are kind of 2/3 to 3/4 there. Again, I -- it's difficult to get this right in terms of delivering to you. I can't say that every client has topped up aggressively. And some of the oldest clients have not topped up at all. Some of the medium [onwards]. So really, it's a real mixture. Some of the newer DM ones have been topping up. Because they've started at such a low allocation, they want to get larger.

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Hubert Lam, BofA Merrill Lynch, Research Division - VP [16]

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Okay. And the second question, so over the last year, there also seems to be a lot more competition in emerging market in your space from larger players entering the market. How big of a threat do you think they are in terms of both the margin as well as market share?

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [17]

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Look, every competition is always a threat, right? If you're not beating everybody, you're going to -- not going to win. So we have to make sure we do that, and particularly in performance. We can't afford to be a -- if we're like a passive manager, we got a real problem because we want a -- we have an industry statement in that way. We've got to keep making alpha. And we keep doing it, we're fine. So we feel pretty comfortable about that. It is true that if some of the massive houses come in and try and buy business, that definitely puts pressure on margins. And that's bound to continue, and we're going to have to continue to fight that battle. And that's one of the reasons we broadened the product set and to have high-margin business in there, which is what we're doing. Arnaud?

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Arnaud Maurice Andre Giblat, Exane BNP Paribas, Research Division - MD & Research Analyst [18]

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It's Arnaud Giblat from Exane. A couple of questions, please. Firstly, on -- to come back on the margin question. Historically, you gave us a bit more detail as to how things were panning out. So here, we're seeing flat margins. I'm wondering how the different moving parts go whether it's fee pressure in any given category and mix shift towards investment-grade or high-yield mix shifts between categories. So could you give us a bit more flavor on how margins are going there? And secondly, around the market, you're setting down your shares. You got to be at below 30% to give you more flexibility on the Rule 9. Is this a statement of intent that over the long run, there is maybe more of a willingness to return capital to shareholders?

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Tom Shippey, Ashmore Group PLC - Group Finance Director & Executive Director [19]

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So you're right. The average revenue margin has been about flat over the course of the last 12, 18 months, and it's 48, 49 basis points level. So it ticked up a little bit, half on half. It's down a basis point on this time a year ago. I think the factors at the highest level that are affecting that are, one, large mandates, which I think I referenced. So this time last year, we were talking to you about a number of blended debt mandates, in particular the funded just before the turn of the calendar year. They were quite sizable and priced accordingly. We had a full year impact of those larger mandates. Some of the top-up capital that we've seen as well over the course of the last 6, 9 months has been into relatively large mandates as well. So those top-ups will, as a consequence, be a lower average margin. So that's sort of downward pressure. The flip side has been continued strength in the retail business. So the intermediary-led flows tend to be a higher net revenue margin to us. So it's provided a bit of upward pressure. And the increasing capital in alternatives through Avenida in particular has also provided a bit of a mix uplift.

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [20]

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I mean, on the me thing, it's not some plan to pay out all the cash and then sell the shares. That isn't what's going happen. That's totally separate decisions. So we haven't had, "Oh, what do we do with the capital conversation?" We have the capital because we think it's prudent, and we use it for seeding. I mean, there's a big chunk in seed. And as we have more product, particularly some of this lower-risk stuff, we're going to need to seed it to get intermediaries interested in it. So we want the flexibility we have with seed. So there's no -- it's completely separate. There's been no decision to change anything here. There's no reason we would other than we took a separate decision that's nothing to do with me. Good idea? No, no. No, not at all.

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Gurjit Singh Kambo, JP Morgan Chase & Co, Research Division - Head of Diversified Financials Research [21]

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Gurjit Kambo, JPMorgan. Just 2 questions. Firstly, on the retail versus institutional performance, is there any sort of discernible difference in what clients are demanding and, perhaps, what you're delivering? And then secondly, just in terms of the alternatives space. Are you looking at the sort of private market spaces whether it's debt or equity in emerging markets? Or was that too immature at this point to enter?

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [22]

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Just dealing with the second question first. The -- we do look at private markets. We've done it forever. So we do private equity and private debt. We have products that do that. Hard to raise. We find it hard to raise a lot of assets there. So it doesn't mean we won't still do it because we want it to be relevant to what we do, but because it helps us in terms of information flow, et cetera. But we're going to be very comfortable that we can do something significant and worthwhile. So that tends to grow slower. Increasingly, larger-scale private equity houses are kind of reapproaching EM because they're kind of cash long and finding less opportunity except more squeeze in the developed world. But I think they find it complicated. It is complicated. You got to -- it's not just legal. It's personal in terms of who you deal with, it's got -- it's more complicated. So we like the business space because of inflation but also the margin stuff. We think there's an opportunity to grow things, hence the real estate push to be a bit more into real, real estate as opposed to just equity investing. So I think we'll try and do more of it. It's very people and very local sort of focus. You got to have -- it's very hard to say we'll just -- we'll create a global platform. What I think you've got to do is you've got to be very close -- to be good at what that -- those people do, they've got to be close to finding deals and close to local people. So you tend to build it in bits and pieces over time. What was the first question again, Gurjit?

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Gurjit Singh Kambo, JP Morgan Chase & Co, Research Division - Head of Diversified Financials Research [23]

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Alternatives.

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [24]

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Oh, yes, between the 2, between institutional and retail. I guess, the simple answer is no because the way we access retail is through intermediary banks, and their analysis is basically institutional. A slightly more complicated answer, which maybe is what you're getting at, is in some of the institutional space, they want something very tailored to them. So they do -- I was mentioning [a pitch] recently. They decided they want sort of EM-light return. So they want something designed particularly for them, so which we do, which we're happy to do in absolute returns. They don't care about the index. They want something in terms of absolute return. Now there are some retail people who want that too, so it's not a completely accurate statement. But everybody wants performance. But institutions have probably -- well, interestingly, retail, you would think, was hotter money, and it is but to a very small extent. At the margin, it's actually quite slow money. It does move around, but the bedrock gets bigger as long as you generally produce decent returns. Some institutions are extremely hot. So some of the institutions -- some of -- not pension funds, but some of the -- some of sovereign wealth funds are crazy hot money. Yes, they can be incredibly performance-focused to the minute almost. I don't know if that covers.

Anybody else? Gentleman over here. Sorry, I have one guy here with me. Oh, there we go.

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David Leslie McCann, Numis Securities Limited, Research Division - Director & Diversified Financials Analyst [25]

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It's Dave McCann from Numis. Just a point you made on the outlook slide there around the continuing EM capital inflows. Can you just clarify whether you're talking there about the industry in general or something Ashmore-specific? And if it is an industry point, could you maybe comment on what your experience has been kind of year-to-date client activity sentiment-wise? It'd be helpful.

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [26]

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Do you want to cover that?

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Tom Shippey, Ashmore Group PLC - Group Finance Director & Executive Director [27]

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So I think the points that we've made around 2019 has been a pretty positive start to the year. At the index level, I think you can track what the fixed income and equity indices have done year-to-date. Fixed income indices are up somewhere between 400, 500 basis points. Equity indices are up sort of 500-plus. So that all is well for kind of activity tone of conversations.

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [28]

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So that's Ashmore-specific.

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Tom Shippey, Ashmore Group PLC - Group Finance Director & Executive Director [29]

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Yes.

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [30]

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As a broader point.

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Tom Shippey, Ashmore Group PLC - Group Finance Director & Executive Director [31]

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As a broader point. So for us, decent start to the year, performance and flow-wise. That comment in particular relates more broadly. I'm sorry, there's a second part to the question, sorry.

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David Leslie McCann, Numis Securities Limited, Research Division - Director & Diversified Financials Analyst [32]

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Yes, just to know whether that really is talking about Ashmore specifically, i.e., did you see capital indices year-to-date? Or whether that...

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Tom Shippey, Ashmore Group PLC - Group Finance Director & Executive Director [33]

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It's a broader point, but the readthrough into how things are going, a couple of days into 2019 is that things are all right.

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Paul McGinnis, Shore Capital Group Ltd., Research Division - Research Analyst [34]

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Paul McGinnis from Shore Capital. Just struck by the stability in the EBITDA margins in the sort of mid-60%, and with the business becoming -- increasing its retail focus. I mean, you'd have to go back a couple of years for the U.K. regulators somewhat bizarrely picked on operating margins as a metric, which suggest there's too much profitability within the industry. Obviously, you guys aren't specifically U.K. retail-focused. But with retail increasing or indeed I don't know whether it's a conversation you have with institutional clients, whether your operating margins are ever part of any discussion around pricing, but whether ultimately you see any pressure either on fees coming down or compensation ratios going up such that when 60% is reasonable in eyes of either regulators or clients in the long term.

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [35]

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Yes. I mean, you're right. It's kind of a rolling question and issue, and it pops up from time to time. There are certain things in the way we do things that we are determined to continue doing that aren't necessarily ticking a box, so one of which is our compensation model. I think we've talked before about operating margins, and we're not tied to a particular number, but we'd always like to be if we can, in the 60s. As we grow, of course, that will get harder. But we, touch wood, have been able to be relatively efficient in terms of cost growth and returns. I think there's no -- I'm just trying to think. I haven't yet had a conversation with somebody who said, "You got a great margin. We should pay less fees." The conversation is, "We should pay less fees." They don't really care about us. They just want less fees. That's the whole thing. Now and for us -- you're right, the U.K. thing was particularly interesting. But for us, most of our retail is not the U.K. It's not that we don't love the U.K., but we don't -- we're doing -- obviously, there is some there, but most of it isn't at the minute. It's kind of Asian and U.S., although the U.K.-European piece is growing. What happens, happens, but we're not going to change our business model for that.

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Unidentified Analyst, [36]

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(inaudible) from Berenberg. Two questions, please. One on the EBITDA margins. You said the IFRS 16 impact on the balance sheet was limited. Are we expecting sort of a tailwind on EBITDA margins following the full implementation of IFRS 16 in the full year? And...

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Tom Shippey, Ashmore Group PLC - Group Finance Director & Executive Director [37]

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Small office with a short lease. So yes, that's a good point. There is a small impact, but it's not a big one on EBITDA. And remember, the shift because of IFRS 16 is out of operating costs and into half, but it's fine.

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Unidentified Analyst, [38]

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And my second question, shall we expect the dividend to grow slower, actually, the 1.5x dividend color as you are trying to do around 1.3, 1.4?

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [39]

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It's growing slower. I mean, it's not growing. Basically, that's what has been happening. So actually, it just hasn't grown. Yes, we have lots of debates about this. I mean, 1.5 is a number. Is it necessarily the number? I don't know. But we could talk about lots of different numbers. But we would like to get there at least, so you can make some inference from that, and in a sustainable way. I mean, we've always tried to run the business really conservatively, hence, the cash proceeding and all that kind of stuff to make sure that we're protected in the downturn. We'd love to grow it, but we're not going to grow it at the sake of cover.

Okay. Well, great. Thanks very much for coming, everyone. As ever, much appreciate your interest, assuming you're still interested. And we look forward to seeing you in 6 to 8 months. Thanks very much again.