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Edited Transcript of ASHM.L earnings conference call or presentation 6-Sep-19 8:30am GMT

Full Year 2019 Ashmore Group PLC Earnings Presentation

London Sep 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Ashmore Group PLC earnings conference call or presentation Friday, September 6, 2019 at 8:30:00am 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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* David Leslie McCann

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

* Hubert Lam

BofA Merrill Lynch, Research Division - VP

* Michael Joseph Werner

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

* Paul McGinnis

Shore Capital Group Ltd., Research Division - Research Analyst

* Shamoli Ravishanker

Morgan Stanley, Research Division - Equity 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 for coming. It is now 9:30. Full year results for Ashmore Group PLC to the year ended 30th of June '19. If you're not here for that, please change your rooms now and find something more interesting to do.

My name is Mark Coombs. I'm Chief Executive. This is Tom Shippey, Group Finance Director. And as usual, it will be a double act. So starting off with an overview of how we think we've been doing. We had fairly strong operating financial performance in the year. We would say this, but we think active management delivers outperformance and our numbers are decent now. 90% of our assets outperformed of above 1, 3 and 5 years. In fact, all 3 of those.

AUM, at the headline level, increased 24% year-on-year, which is good. Net inflows of $10 billion, decent, not as good as the year before, but we're happy with that. Management fee income up as a result, as you would expect, on a growing book of business, 17%.

Our adjusted EBITDA up 10%, and we'll talk about the detail for the difference between those. We managed just to maintain our margins at 66%. Diluted EPS has grown 18%. Dividends per share maintained at GBP 16.65. That's kind of the numbers.

Where do we go from here? We feel relatively good about life, actually. Thank goodness, we've had a little correction in the markets over the last couple of months because that gives us the chance to do what we do, really, which is to acquire risk and pick the things everyone panics from. So we rather like that. So we're feeling pretty good about life for the next 12 months from here.

At the macro level, the GDP growth premium against DM continues to grow. As for the DM, well, it's happening. It's starting from a low base, but now we're getting now -- if we're getting a 5 billion and producing, you'll start noticing. It's beginning to make a difference. So we're pleased with that. So the strategy is working there.

Performance -- it's still me, right? Yes. Performance, we kind of covered this before. But 1 year now, pretty -- we're up at 90% overall outperforming of our capital against the benchmark. Benchmarks are not always the best indication. Some of the benchmarks are crazy, but it's a proxy.

Peer performance, we care about as well, and we're up there on peer performance in all the strategies from equities through to the various fixed income strategies. We're happy with that. 3 years, pretty high, too. The equity number is a bit lower because a couple of single country products had a slightly difficult period, but the global products are all outperforming. So we're pretty pleased with that. And over 5 years, we're at the same sort of level.

So what we did, in both equity and fixed income books in 2018, has worked for us. You?

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

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Yes. Okay. Thank you. So I'll take you through the numbers. As Mark said, we think Ashmore delivered a strong financial performance this year, driven by the 24% growth in assets under management. And as I'll walk you through shortly, the main component of this growth was broad-based net inflows of $10.7 billion across the client base, with investment performance adding a further 7 billion. Net management fees increased 17%, consistent with the 16% year-on-year growth in average AuM. Our wealth performance fees were, as expected, lower compared with the prior year. Adjusted net revenues grew by 11%.

The group continues to exercise strict control of its operating costs. Total costs increased in line -- driven by the strong growth in net management fee income, adjusted net revenue increased 11% to GBP 308 million.

Despite the strong growth in AuM and revenues, the group has maintained its strict control of operating costs. Nonbonus operating costs increased 8% year-on-year, the majority of which is due to the acquisition of Ashmore Avenida in Colombia. The like-for-like cost increase was only 3%, primarily reflecting the impact of weaker sterling on the translation of operating costs in the overseas offices.

The business model, therefore, continues to operate efficiently and has successfully absorbed the impact of MiFID II research costs and the establishment of the management company in Ireland, which is now operating as business as usual. This means the group is operationally prepared for the risk of a hard Brexit scenario.

Average headcount increased 16%, while fixed staff costs increased by only 10%, given the nature of the acquired retail -- real estate business in Colombia. In the current financial year, I would expect only limited inflation and the combined staff and other operating costs of approximately GBP 50 million. The variable compensation charge of GBP 57.7 million is 19% higher than in the prior year, consistent with the strong operating and financial performance delivered by the group.

And finally, a brief word on the impact of IFRS 16. Ashmore's property lease commitments resulted only a minor net impact on the P&L from the adoption of the new accounting standard and a negligible effect on the regulatory capital position.

In the 2020 financial year, the impact will be to reduce operating costs by GBP 2.9 million, as rent expense is no longer recognized and to increase the amortization charge by GBP 2.5 million as the right-of-use assets are written down. The final element is a GBP 0.6 million lease finance expense to give a net impact on profit before tax this year of negative 0.2 million.

This year, the group has maintained its high level of seed investment activity, with a market value of invested capital growing to GBP 277.8 million and the total program, including committed but not yet drawn funds, increasing from GBP 260 million to approximately GBP 300 million. Seed investments totaling GBP 108.3 million were made in a number of funds covering the new strategies Mark mentioned, including the low volatility, local currency bond fund and a blended debt ASC fund as well as adding more scale to existing funds to enhance their marketability for intermediaries.

GBP 77.8 million is profitably redeemed in the period, predominantly from funds in the corporate debt and alternative themes, realizing a gain of GBP 2.4 million. This takes cumulative realized seed capital profits to approximately GBP 55 million, representing approximately half of the total profits recognized in the P&L over the life of the program.

The combination of the realized gain and the positive mark-to-market of the seed investments delivered a total pretax profit of GBP 10.7 million. The detailed breakdown of this figure is in the appendix. As you know, modeling the impact of the program is complicated by accounting, and therefore, I'd continue to recommend simply applying market movements to each of the investment teams to calculate the overall PBT impact.

While it's good to be able to report gains in the portfolio for the period, the primary aim of the seeding activity is to provide a commercial advantage and to deliver growth into third-party assets under management. The mix of seed investments by theme supports this objective, with significant current commitments to the equities and alternative themes. And in total, 16% or more than $14 billion of the group's current AUM is in funds that have been seeded through the program.

To complete the review of the P&L, the group's profit before tax increased by 15% to GBP 219.9 million, reflecting the 10% growth in adjusted EBITDA, plus the seed capital gains and higher FX translation revenues in the period where sterling weakened against the dollar. The effective tax rate of 17.5% is below the U.K. corporation tax rate due to the higher share price, increasing the level of tax relief from vesting share awards, coupled with the changing geographic mix of the group's profits.

Looking ahead to the current financial year and excluding any share price effects, I would anticipate an effective rate of approximately 18%, again, slightly below the U.K. rate for the period.

On a statutory basis, diluted EPS increased 18% to 25p per share. After adjusting for seed capital and FX translation effects, diluted EPS increased by 15% to 23.4p per share. The stated objective of restoring dividend cover to at least 1.5x has now been achieved, resulting in the Board recommending an unchanged final dividend of 12.1p per share.

Turning now to the cash flow. Ashmore's business model consistently converts operating profits to cash and delivered GBP 214.3 million of operating cash flow for the year, equivalent to 106% of adjusted EBITDA. This cash was used in consistent ways to previous periods, with 2/3 being paid in tax and ordinary dividends to shareholders. The group's CBT has continued to purchase shares to offset the dilutive impact of employee share awards. And as mentioned, there was a meaningful increase in the scale of the seed capital program this year. There was also a small cash consideration paid to acquire Ashmore Avenida. After recognizing the positive FX translation effects, the group's cash balances ended the year at GBP 463.1 million.

And finally, for me, a recap on the balance sheet. Our strategy is to maintain a conservative and consistent balance sheet structure through the market cycle in order to provide assurance to institutional clients and to provide the flexibility to continue to invest in seed capital and bolt-on M&A opportunities as they arise.

At the year-end, the group's balance sheet meets this objective, with GBP 678 million of total capital resources, primarily held in cash and liquid seed capital investments. This represents an excess of approximately GBP 558 million over the Pillar 2 regulatory capital requirement of GBP 121 million. The Pillar 2 requirement marched up a little this year compared with the prior year-end, reflecting a higher operational risk requirement as a result of business growth, offset by a small reduction in the requirement for credit and market risks.

The group's balance sheet remains weighted towards U.S. dollars, and the current sensitivity of pretax profit to a movement in the cable rate of $0.05 is approximately GBP 4 million.

I will now hand you back to Mark.

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

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Thanks, Tom. Thank you. So a bit more on outlook. Yes. I mean everybody is pretty sweaty about the U.S. and what that does for global growth, and that isn't going anywhere out there, so it is what it is. And everything is about price. So it's trader's market in my view. And we're happy with that. That works for us.

I mean the best case probably for the U.S. economy is growth, but not great growth. And the market is going to be dancing around fears of a recession, half of them or one because they want to see Trump disappear. But be careful what you wish for, and he obviously gets very nervous in terms of the bond market. The only good thing about all of that is the developed market central banks, they're very dovish, so -- in the fixed income space. You're looking at very, very low yields or negative real yields, in some cases. 13 trillion now of developed market bonds have negative real yields. So -- in fact, even negative yields. So that -- actually, if you're wearing an EM fixed income hat, it gives you a pretty good underlying backdrop as long as you don't screw it up in credit areas. So what it produces, I think, is a very strong bid for the better credit in EM and a general bid for, as you go down the curve in terms of credit. At the margin, it's incremental capital. So the trick is don't screw it up with the wrong credits and you should raise assets and perform well.

We talked about the growth premium and relative to low inflation, higher real rates in EM. They're easing policy generally, and we had a sweaty July and August around a couple of particular situations, which is a good thing. It puts value back into things. And if you look on the right, external debt spreads have notched up quite nicely through that. The reason they're not higher is because the investment-grade stuff is if anything, tighter around that whole drive for yield. So I think you're going to see the market very much sort of breaking into the 2. General trend for investment-grade, as long as there really is investment-grade, to get tighter and the high-yield stuff, trade it. By value, trade it. Do what we always do in that space.

So we really like where we are there. In equities, we think things are pretty cheap as well, particularly, vis-à-vis the growth outlook compared to DM. So if we look at what we're doing in multi-asset, we're starting to acquire risk and equity. I think people got -- generally got too sweaty. Well, what's the good when people are sweaty because they could over sweat. Everybody does the wrong thing in August and accentuates what they do.

So in summary, in terms of where we see things, for us, good operating financial performance. We'd always like to be better, but it's good. We're active managers. We deliver outperformance. We're doing it. Hurray. AuM has grown strongly and net management fee income has grown, too. That's a good trend. The adjusted EBITDA is up 10%, and we've kept our margin at 66%. We're happy with that. Dividend per share at 16.65p. Diluted EPS plus 18. Okay numbers for our shareholders.

Going forward, which is what always matters in life, we think we're in pretty good shape. We think EM is cheaper than it was, tick. We think inflation is pretty much under control in EM. I mean there can be -- there are exceptions, but it's pretty much under control. DM yields are terrible, and DM equities are probably overpriced unless they're ones that have a lot of opportunity to expand in the growth regions of EM. So we think we've got relative value in equity, too.

The incentives are all there for investors to reallocate to emerging markets. What happens when you've had a sell-off in a market? And we've had a bit of a sell-off in the debt and equity markets, is you get the tourists that panic, which creates value. So those that think longer term, they take a month, they take 2 months, and then they allocate, and they do much better.

So our longer-term investors are all dusting themselves down off at Labor Day and saying, what should we be doing here? So the interesting thing for flows is what happens when you get through the month after Labor Day, after you've had the August action, see what happens in the October, November period. And usually, what happens is people buy later than they should, but that's okay. We don't.

So I think that's probably about it for me. I'm happy to take questions, as is Tom. I'm happy to pass you the mic, in fact. I can do it. I love that, actually. Interactive. Okay. Okay. I want some WWF, (inaudible). Who wants to -- oh, here we go. Go for it.

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Questions and Answers

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Paul McGinnis, Shore Capital Group Ltd., Research Division - Research Analyst [1]

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It's Paul McGinnis from Shore Capital. Just looking at Slide 19, which is the breakdown of the management fee margins. I'm just tying that back to the comment that in terms of guidance, do you still expect sort of deflation of roughly 1 basis point every 12 to 18 months?

I was interested in the comment around the effect of large mandates being sort of minus 1.5 basis points. Is there any particular reason why you would expect that feature to be ongoing? Because, obviously, that's quite a big potential deflation. I was just wondering why that would be a theme and wouldn't just kind of move around either up or down in any given year?

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

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You're right. It may grow. It was a particular theme in the last 12 months because we've seen notably large clients adding to existing large mandates. That may not happen again in the next 12 months, but it has been a feature over the last 12. So the 1% aggregate downward trend in the margin is a combination of a number of different things.

The aggregate expectation is that it will continue to be about 1 basis point also in retail up to 18 months. I may be completely wrong because we may massively grow our alternatives business or the overlay business might shrink. So the mix impact may offset it, but a sensible assumption is 1 basis point every 12 to 18.

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Paul McGinnis, Shore Capital Group Ltd., Research Division - Research Analyst [3]

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But on that basis then, in terms of true like-for-like pricing, is there much going on?

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Tom Shippey, Ashmore Group PLC - Group Finance Director & Executive Director [4]

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So the true like-for-like pricing is in the 0.5 basis point of other stuff that we can't assess from just looking at the headline moves in investment themes and size of product. So that's where the like-for-like pricing impacted.

And again, unfortunately, there are a number of things in that 0.5 basis point. So as for like-for-like pricing, there's also a sub theme mix, so investment grade versus noninvestment grade performance and flow.

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [5]

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Please, whoever has got the mic? Are you ready?

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David Leslie McCann, Numis Securities Limited, Research Division - Director & Diversified Financials Analyst [6]

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David McCann from Numis. First, just on the dividend policy. You referenced there at the end, you obviously got back to the 1.5x cover. Obviously, it's effectively been at the same dividend per share for 5 years now. I mean looking forward, should we now revert that to kind of 1.5x cover being a reasonable guide to what the dividend is going to be with roughly the kind of splits? Just really looking for some color given the dividend policy has been about unusual, should we say, for this. Well, that's, I guess, question 1.

Question 2 is on the variable comp ratio. So maybe just a bit more color on -- the 22.5% is obviously above the 20% average. Appreciate it's within the range of, I think, 15% to 25%. And again, is 22.5% a new norm? Or is 20% still the norm that we should ordinarily expect?

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

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So starting with the dividend, do you...

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [8]

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Tom?

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Tom Shippey, Ashmore Group PLC - Group Finance Director & Executive Director [9]

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Yes. So the 1.5 was a targeted floor. So I think we're bang on it to the sort of second or third decimal place, I think, this period. So no scope to increase it this year. I mean next year, it will depend where we are. I mean we don't want to be bang on 1.5 every single year. So 1.5 is the floor rather than exactly what we will pay out every year. But if earnings grow another 15% to 20% next year, obviously, that gives us some scope to increase the dividend from here.

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [10]

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Yes. Exactly. We'll try to be prudent, but, obviously, we would like to, if we can. And then in terms of comp, well, we keep accruing at 20% because it's in the middle. So that's what we just do. It will depend how we perform, how the business performs, how our people perform. We try and adjust it based on whether we're doing better or not, and we'll keep doing that. So there -- I don't think there is a new normal. But I don't know until I've seen a few years and think, oh, that's the new normal.

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Michael Joseph Werner, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst [11]

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Mike Werner, UBS. We saw I think, a little bit of retail outflow in August really tied to the short duration bond fund. I was just wondering, are you still seeing outflows from that product? And I think that's tied to some concerns in Argentina. And I think institutional investors tend to be a little bit more of longer-term focus. How are your conversations going with them? I know it's a couple of days after the summer holidays, so it's a little early there. But what are you seeing from the institutional names with regards to, I guess, concerns about country-specific exposure?

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [12]

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Shall I take that one? It depends on what -- I mean, generally, we haven't had a lot of institutional meetings in the last sort of few days. So the activity has been telephonic and e-mail and Bloomberg, so it tends to be existing investors.

Yes. I mean some of them just aren't really thinking about it yet. They'll take the month. In terms of those that are, institutional investors generally are saying is this a time I should be adding to what you do in both fixed income? And this is a good time to start doing stuff that will give an equity, which is a good conversation.

Some institutions think even more retail than others. So there is -- there has been some institutional activity in that August outflow. That's the kind of hot money that you think, okay, we won't push too hard to get that back next time. No need, because nobody needs somebody trading upfront for a couple of months. It's kind of boring. So what tends to happen after a strong period of inflow is you get a whole bunch of people who say, "Oh, this is good, we need some yield in dollars." And then they get terribly sweaty about headlines and we -- although you, of course, have explain -- I mean this is so typical. I mean it's like a record, broken or otherwise.

So you tell them, look, this is a great fund, it's going to move a credit. That's the whole point. When the credit marks down, this is great, you should be buying it because the yield goes through the roof on this thing. And 1 in 10 people do it.

Meanwhile, some of the tourists disappear in a panic. And so I always assume that in a sell-off, in anything, particularly a product that's giving people an ongoing yield, that you can lose 30% of your money, worst case.

We -- as you say, we have had some -- we did have some redemptions in the seek out fund but partly because of the nature of the investors, which were retail that sold through the banking system institutionally. So pretty hot money, pure retail money that is just buying the yield and not trying to get clever about it hasn't really moved.

So it's been the kind of how do I juice this stuff kind of guys. There's not much of them left. But in my view, when you get a sell-off of any sort in a product, you assume it's 3 months before you see the flow change. So if we were net outflow in that short duration product in August, I'm assuming we'd be like that for another 2 -- couple of months. But I would expect it to sort of tail off and then start going in, so we'll -- you'll see it because you can see it on the screens, the flows. It'd be interesting to see -- this is a bit like -- this week is kind of, not much is happening, so we get to see what kind of works through September.

Now interestingly, so that seed cap product, which was huge, attracts a lot of people. The 40 Act fund, which is identical in the U.S. is not an outflow, which is much more pure retail, sold simply, no clever s---. So that's interesting because I was -- I've mentally assumed I'm going to get the same outflow, but interestingly, and again, you can see this. It's visible. It's not an outflow. Marginal. Tiny.

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Hubert Lam, BofA Merrill Lynch, Research Division - VP [13]

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It's Hubert Lam from Bank of America Merrill Lynch. Just one question. Can you just give us an update on your exposure to Argentina? I know some funds are overweight and others maybe a little bit more in line. But what's your exposure to Argentina today? And what's your general view on the situation there?

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [14]

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It varies by product. It depends on what we're trying to do and where. So in equity, we would be underweight. In different fixed income strategies, we would be overweight or underweight, depending on what they were. My view is that it's the -- kind of the -- this is the tricky time, so we need to get the election out of the way. And then we see what happens. There is a chance that -- I mean nobody knows. I mean we're busy forming a view, but nobody knows whether the potential new President is Moreno in Ecuador or Chávez from Venezuela. We have a view, but nobody knows that yet. You only tell over time. What he's trying to do now is get elected, which is a difficult course for him to steer, right? Because does he want to inherit chaos? Or does he want to inherit reasonably, okay, difficult, but stick with a program, tweak it as necessary, but get a country that's -- was beginning to do better before the fear of him being a very difficult, extreme left-wing president?

So we're in an interesting period. We -- I mean we think to bring -- the assets have sold so low in the dollar space, that they're incredibly cheap. Yes. I mean they were extremely cheap last week.

There have been things -- it's a bit of a rally at the moment going on in the local currency and fixed income. So equity, we think it is, too. So we're not particularly running around for it. We don't like equities here.

Local currency is becoming a very technical market. Is it the restrictions on capital movement? So it's becoming much less liquid, so it's very hard to have a position in that. You can have a self-liquidating position, but otherwise, there's no point. It's not big enough there to do much.

So it's interesting. It's the sort of worst -- when you've got a problem, it's -- the last thing you want is a lame duck president. So you've got a very complicated 7 weeks to get through for everybody, for them, for the IMF, for the president, for the opposition.

So what's going to happen actually is they're going to end up talking a lot more because they haven't got a choice, which is beginning to happen. But talking while campaigning is tricky. So we're going to see lots of bad headlines, and we're happy with that. We think if stuff is cheap, based on any kind of aggressive restructuring, which we don't think is the base case, but if it's cheap based on that, that's fine. We like that. We're a buyer of that. Well, that price.

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Shamoli Ravishanker, Morgan Stanley, Research Division - Equity Analyst [15]

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It's Shamoli Ravishanker from Morgan Stanley. Just a question on your excess capital. You have a considerable position there.

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David Leslie McCann, Numis Securities Limited, Research Division - Director & Diversified Financials Analyst [16]

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Excess? Prudent.

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Shamoli Ravishanker, Morgan Stanley, Research Division - Equity Analyst [17]

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And how you think about deployment of that going forward and what your internal return on capital hurdles are when you think about considering potential investments?

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Tom Shippey, Ashmore Group PLC - Group Finance Director & Executive Director [18]

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So we use it for the same things that we've always used it for. We'll continue to seed the GBP 3 million number fully invested at the minute. We'll move around depending on future opportunities in the next 12 months as well as what we manage to successfully redeem.

Going forward, I would expect it to be pretty consistent. I don't see there being a huge incremental amount of capital going into seeding from here. It will also help us to look at little bits of infill M&A. But as I said, more bolt-on than anything fundamentally life changing. Having the resources there to be able to consider that and fund it is useful.

And as, yes, Mark says, being conservative and running a well-capitalized balance sheet is sort of in our DNA. We think it's the appropriate thing to do in a cyclical industry to help underpin the dividend in the more difficult profit cycle of '14, '15, '16. Having the liquid resources available to us, we think positions us well. We do have internal thresholds for return and allocation, but those are internal.

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [19]

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And also, we're not allocating capital. The capital is principally used to seed product, to leverage, to create additional management fee and performance fee income. So what we're not doing is saying, every day, hey, you know what, that's cheap. Let's trade it. We're not doing that one. It's to build the core business.

Is that it everybody? Okay. Great. Thank you very much for coming. It's been a pleasure to see all as ever. Thanks for your time, attention and trading our stock or having your colleagues, friends, acquaintances do it. We'll see you again in 6 months. Thank you very much.