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Edited Transcript of ASHM.L earnings conference call or presentation 7-Sep-18 8:30am GMT

Full Year 2018 Ashmore Group PLC Earnings Presentation

London Dec 13, 2018 (Thomson StreetEvents) -- Edited Transcript of Ashmore Group PLC earnings conference call or presentation Friday, September 7, 2018 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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* Christopher Myles Turner

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Hubert Lam

BofA Merrill Lynch, Research Division - VP

* Michael Joseph Werner

UBS Investment Bank, Research Division - Executive Director and Equity 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 for coming. We'll make a start, I think. Ashmore Group PLC, just in case you're in the wrong room. There's something better down the path. So quickly leave now if you want something more interesting.

Result -- our results for the year ended June 18. Thank you very much for coming to see us and listen to us. Same sort of format as usual, Tom and I will talk. He'll make a lot more sense, and then we'll take any kind of questions you'd like.

So in overview, we had a pretty good year, moving in the right direction. Operating and financial performance was good. Our outperformance continues generally, not as strong as the year before, but that's typical in many cases after an outstanding year. You have a good year if you're doing well. We have 94% of our assets outperforming over 3 years, which is what we'd -- kind of thing we're happy with is salable, so we're happy with our performance. It can always be better. We love it to be better every day, but satisfactory.

A good metric for us, I will say, AuM growth. That's a positive coming off 2 or 3 years ago when people were depressed about what we did. Now they're a little more positive. So as long as we continue to perform, AuM growth continues. So we're up to $74 billion at the year-end, and we had record gross and net flows, which is good in terms -- so we're happy with that. We'd love that again, which is the message to the sales force, and let's try to do harder.

Client demand has been pretty broad-based in that, and some of the things that we're trying to do strategically have gone pretty well. So we're happy with that. Things that we've been pushing for a while have been growing. Retail, as you know, 3 real markets for that. We categorize U.S., Asia, Europe. Actually, Asia and Europe were very strong. U.S. was not as strong as we'd like it to be, so we've got more things to do there and more work to do there. So we're working on that.

Our local businesses, which as you know, is part of our strategy to start mobilizing domestic emerging market capital, not just international capital into EM but domestic emerging market capital within EM, are beginning to create some growth, up 26% from a small number, but it's the right direction. And it's the kind of thing we want to have happen, and we think we can do a lot more there, as you know.

We continue to try and manage our costs on the basis that if you manage your costs, you make profits easy. And if you don't, we continue to do that. Our adjusted EBITDA, plus 14% year-on-year. And the EBITDA margin, adjusted EBITDA margin to -- up to 66% by a point. And we still generate cash. And so business is doing fine. We're comfortable with it. We always want to do better, but we're comfortable with what we're up to.

In terms of outlook, the last 6 months have been pretty sweaty in EM but absolutely typically, really. Anybody who ever cares to listen to me, election years are classically exactly the same in EM, so we're just going through a very typical EM cycle. The degree of noise that one gets from men with orange faces, et cetera, or hair, whatever -- however you want to define people, it happens. We expect market weakness in election years. We love that, frankly. We would expect to acquire risk towards the bottom of those periods, and we would expect to make outperformance over the next couple of years. So same old, same old. We're comfortable with that.

Certain countries will get stressed from it, but that's fine. The skill is to try and avoid those or make the best of those when they're priced correctly. So we quite like stressed countries because we quite like to acquire them at the right time.

Fundamentals, otherwise, are relatively good. As a specialist and as active, we ought to make the best of this. So we'd be very disappointed if we didn't do pretty well over the next couple of years out of this.

So that's kind of the overview. Do you want to take over for the next 2 hours?

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

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I promise, 2 hours.

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

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Thank you, Tom.

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

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Great. So good morning, everybody.

In the more positive operating environment over the last 12 months, Ashmore's business model has delivered strong operational and financial performance. Assets under management rose 26% to $73.9 billion, driven by record net flows of $16.9 billion, offset by negative investment performance for the full year of $1.4 billion. This high level of AuM, coupled with good levels of outperformance across the group strategies, delivered an 11% increase in operating revenues to GBP 278.3 million, comprising 13% growth in net management fees to GBP 250.5 million and GBP 21.9 million of performance fees.

Now while the market backdrop has been more positive, as Mark mentioned, Ashmore's efficient operating model is maintained, meaning that adjusted operating costs increased by only 6%, delivering an adjusted EBITDA margin of 66% and adjusted EBITDA of GBP 183.6 million, up GBP 22.5 million or 14%. This operating result delivered GBP 210.1 million of cash flow.

Reflecting the year-on-year impact of the slightly stronger sterling and a lower level of seed capital gains, reported statutory profit before tax totaled GBP 191.3 million, 7% lower. And diluted earnings per share was 21.3p, 10% lower than the prior year. Taking into account this improved operating performance but recognizing the reduction in statutory earnings, the board has proposed a final dividend of 12.1p per share, taking the total dividend to 16.65p, in line with 2017.

Looking at the year, assets under management developed in a bit more detail. Throughout the year, there was a high level of client interest, leading to strong demand for the group's products across the range of investment themes. Gross subscriptions of $30 billion, representing 51% of opening AuM, was split equally between H1 and H2 and was double the level of sales achieved in the prior financial year. Total redemptions were $13.1 billion, broadly in line with the prior year level but slightly lower in the second half. Given the strong markets experience in 2016 and '17, there was some profit-taking evident in the first half, particularly in areas which have seen very strong absolute levels of performance, such as local currency. In aggregate, therefore, the year delivered record net current net flows of $16.9 billion, demonstrating the improving sentiment towards the various emerging market asset classes, Ashmore's ability to deliver strong investment performance and the success of the global distribution teams in accessing increasing client allocations. While the level of net flows delivered in 2018 may not be repeated in the near term, over the typically quieter summer months, we've continued to see broadly consistent areas of investor focus and demand as clients view recent market conditions as an opportunity. For example, retail demand for the short duration product has continued, and institutional flows have been focused on local currency in blended debt product.

Positive investment performance in the first 9 months of $3.8 billion was delivered by the group's active investment processes across all asset classes. However, the weaker market environment in the final quarter of the year resulted in negative performance of $1.4 billion over the 12 months, particularly reflecting foreign exchange weakness in local currency and blended debt portfolios.

Closing AuM was $73.9 billion, 26% higher than at June '17 and 7% higher than the average level for the full year of $69.2 billion.

So what is underpinning these flows? Firstly, the market environment has clearly been more positive for some time now, with improved absolute performance across the range of emerging market asset classes. External debt, for example, has delivered cumulative positive returns of 15% over the past 3 years, and Ashmore's consistently applied investment processes are delivering good levels of relative outperformance, with 94% of funds outperforming their benchmarks over 3 years. Secondly, there's a broader understanding of the return opportunities available across emerging markets leading to increasing allocations over time. This is demonstrated by institutional allocations to fixed income doubling in percentage terms since 2010 and equity allocations doubling since 2005. It's worth noting, however, that both these measures remain significantly underweight relative to neutral benchmark weightings of between 15% and 20%.

Combining the impact of these factors with Ashmore's strategy of engaging directly with clients and the more positive tone of discussions over the last 18 to 24 months has led to improving net flows shown in the bottom right-hand chart. The earlier adopter segregated accounts led the flows in 2017 with a much broader spread and higher content of pooled fund and segregated account close in 2018.

So turning now to look at this year's net flows in a bit more detail. The group's well-established global distribution capabilities have generated broadly diversified net flows across the product range. As can be seen from the bar charts on the top right, the net flows are well balanced by product type, geographic region and client category, with no one product, geography or client segment driving the net flow passing. On the institutional side, we've continued to see a bias through existing clients topping up mandates and particularly with clients in Asia and the Middle East adding to large accounts in excess of $0.5 billion in the blended debt and local currency themes. New client wins are skewed to external debt, corporate debt and equity themes, including some notable mandate wins of $300 million or more from U.S. and European institutions.

Retail flows, as Mark mentioned, were strong notably in Asia and Europe, with blended debt and short-duration strategies continuing to resonate well with the intermediaries and their clients as well as specialist equity products such as Frontier Markets. These stronger retail flows reflect the investments which have been made in intermediary relationships over the past few years, which are now are beginning to deliver. Retail AuM sourced through such intermediaries grew to almost 50% to approximately $10 billion, driven by strong net flows of $3.7 billion or 22% of the total net flow, meaning that intermediary-sourced AuM now represents 14% of the total upfront 12% a year ago.

In keeping with the third phase of the group's strategy to source AuM from emerging-market domicile clients, the group's network of local market businesses has delivered good AuM and profit growth. Collectively, these platforms now manage $4.9 billion, up 26% over the year and represent 7% of the group total. Total AuM managed on behalf of EM domicile clients now represent 1/3 of total AuM or $24.5 billion.

After the end of the financial year and in keeping with the strategic objective to grow our alternatives theme, the group completed the acquisition of a majority stake in Avenida Capital, a Latin American real estate manager with approximately $300 million of assets under management. Avenida was founded in 2006 and has invested in projects in Colombia, Brazil, Chile and Panama, and so provides Ashmore with a platform to expand its real estate investment activities, initially across the Andean region. The transaction is expected to be modestly accretive to profits in the financial year to June '19.

Turning now to the financial results in detail. During the period, operating revenues increased GBP 28.5 million or 11% to GBP 278.3 million. Looking at each component in turn, recurring net management fee income was 13% higher at GBP 250.5 million. This increase was largely driven by higher average levels of AuM, partially offset by a lower revenue margin and sterling being, on average, 6% stronger against the dollar in the year at GBP 1.35 versus GBP 1.28. At 49 basis points, the average group management fee was 3 basis points lower than the prior year, with the movement being attributable to large mandate wins predominantly in the first half. The higher net management fee achieved on retail AuM growth broadly offset other factors such as competition in the period, and the investment theme mix effect in the year was negligible. Looking ahead, while the continued growth in retail and locally managed AuM have had a positive impact on the margin, I'd expend the -- I would expect the longer term trend of a [one to] basis point reduction in the average margin every 12 to 18 months to continue, subject to mix.

GBP 21.9 million of performance fees were around in the period, a touch ahead of expectations due to the strong, absolute and relative performance delivered in the first 9 months of the year, particularly in local currency. Given the market weakness experienced in the final quarter, the estimated performance fees from August year-end funds is 0. However, given there are now a number of large, segregated accounts with relative performance fee structures which could deliver a performance fee, at this early stage in the year, I would estimate the full year performance fees will be up to GBP 10 million.

Other revenues grew GBP 4.1 million, grew -- sorry, grew to GBP 4.1 million, owing to an increase in transaction-related advisory fees earned by the group.

Now while the operating environment has been more positive, as ever, we've continued to exercise strict control over our operating costs. And as it is designed to do it at this point in the cycle, the business model has delivered increased profitability. Excluding variable compensation, operating costs reduced by GBP 2.1 million, down 4% from the prior year after having absorbed MiFID2-related research costs from January.

The reductions came in 2 key areas. First, lower staff costs as reported in sterling. Consistent with the growth in the local market businesses, 29% of group employees are now based in the local platforms compared with 25% last year, while the group's average headcount has remained stable at 257. Consequently, fixed cost -- fixed staff costs, as reported, have benefited from a stronger pound against other currencies such as the Indonesian rupiah and the Colombian peso. Secondly, lower other operating costs, notably recognizing the efficiency benefits of the consolidation of office locations in the U.S., savings on third-party service providers and other expenses such as data and travel.

As you may have read in the statement this morning, Ashmore is in the process of establishing an office in Ireland to ensure continued access to EU-based clients, including the SICAV platform in Luxembourg, post-Brexit. Subject to regulatory approval, this new entity will be operational early in 2019, well ahead of the 29th of March. Therefore, though, there's still some uncertainty around the form of the U.K.'s eventual relationship with the EU, the operational impact of Brexit is expected to be manageable, and the financial impact on the group will not be material.

Recognizing the strength of the group's performance across a number of areas, the accrued variable compensation charge for the full year was at 21.5%.

But the group's business model is structured to grow a high quality and diversified range of recurring net management fees to maintain a low fixed cost base and to deliver growing operating profits, with significant long-term alignment of interest for an equity-based compensation structure. In the current period, operating revenues increased 11% while non-VC costs were reduced, delivering higher profitability and demonstrating the positive operating leverage inherent in the model. As the chart on the top-right shows, through the most recent cycle, net management fees have comprised between 89% and 95% of total revenues. And while the operating margin fell to only 62% in 2016, it has recovered to 66% over the 12 months to June. At this stage in the cycle, it's expected that the operating margin will continue to be in the mid- to high 60s.

The group has continued to deploy its capital resources to develop its revenue streams through its active seed capital program in the period. At the year-end, the market value of the group's seed capital was GBP 228.3 million, an increase of GBP 18 million. Undrawn commitments totaled GBP 32.5 million, taking the total of both invested and committed to GBP 260.8 million. During the year, new investments totaling GBP 65 million were made, notably in the alternatives and equities' themes, and GBP 55.8 million were successfully recycled as strategies such as Frontier Market equities and a number of Indonesian mutual fund products achieved scale. Over the full year, the group's seed capital exposures delivered a GBP 10.1 million profit contribution, comprising investment returns of GBP 14 million, offset by GBP 3.9 million of negative foreign exchange impact as sterling recovered against the U.S. dollar.

Taking a slightly longer-term view and looking back over the past 9 years, it's clear that the seed capital program has supported AuM growth across all 3 phases of the group's strategy. This has enabled establishing investment track records in new funds, supporting new distribution channels, enhancing the scale and, therefore, marketability of existing products, particularly through the intermediary channels and providing initial support from the group's balance sheet when establishing local market businesses. In total, we've invested GBP 640 million in our funds and have actively recycled at a profit a substantial proportion, over 70% to date. The principal measure of success of the program is that 14% of the group's AuM, or more than $10 billion, is in funds that have been originally seeded by us, demonstrating that the seeding supports Ashmore's strategic growth initiatives and helps establish recurring management fee income streams.

By way of a recent example, Ashmore seeded the short-duration strategy in 2014, committing a total of $60 million. As the funds grew over the following 2 years, we successfully recycled all of that capital at a profit. The total AuM in short-duration funds is now growing rapidly to approximately $4.5 billion today. And finally, while it's not the primarily aim, the active management of seed capital has delivered financial returns for shareholders in the form of over GBP 100 million of pretax profits, over 1/2 of which has been realized.

Finance income for the period was lower at GBP 15.2 million, principally due to the combination of lower market returns across the seed capital portfolio, which were down GBP 8 million, and negative foreign exchange effects arising on translation of predominantly dollar-denominated seed exposures into sterling. Interest received on the group's cash resources increased to GBP 4.6 million due to a combination of higher dollar cash balances and achieving higher deposit rates in the year.

Looking at the statutory results. The group delivered profits before tax of GBP 192.5 million. So while the operational results for the 12-month period was strong, the GBP 30.9 million reduction year-on-year of total seed capital profits means that profit before tax was 7% lower than the prior year. The group's effective tax rate over the 12 months was 19.8%, slightly higher than the U.K. statutory rate of 19%. This is due to a reduction in the value of the group's deferred tax assets coupled with geographic mix effects, given the growth in profits in locations with higher tax jurisdictions, such as Colombia, Indonesia and Saudi Arabia. Diluted earnings per share was, therefore, 21.3p, 10% lower than the same period in the prior year. The impact to foreign exchange and seed capital on reported EPS was approximately a $0.01 per share in aggregate. Given the improved operating performance but considering the lower level of statutory profits, the board has recommended a final dividend of 12.1p per share to give a total dividend for the full year of 16.65p, in line with the prior year. This implies dividend cover of approximately 1.3x, down slightly from the 1.4x in 2017. In the context of a progressive dividend policy, it remains the board's intention to grow earnings per share faster than dividends to achieve cover in excess of 1.5x.

Turning now to the cash flow. The group's operating model is structured to generate cash by effectively converting operating profits into cash. In the 12-month period, the group generated GBP 210.1 million of cash flow from operations, representing 114% of adjusted EBITDA. During the year, the group paid GBP 47.3 million of tax, distributed GBP 120 million to shareholders, representing approximately 60% of operating cash flow or GBP 18 million of shares into the EBT and invested a net GBP 9 million into the seed capital program. Allowing for interest received in negative foreign exchange impacts, the year-end cash resources were GBP 426.8 million, 1.5% higher than at the start of the year.

Finally then from me, a quick review of the balance sheet, which continues to be well capitalized and highly liquid, characteristics that provide strategic -- significant strategic and commercial benefits to the group. Ashmore's total financial resources increased to GBP 599.2 million, and the group's assessment of its Pillar 2 requirement also increased marginally by GBP 8.4 million to GBP 119.5 million, largely driven by additional commitments to our liquid seed capital investments, together with the impact of higher volatility on the market risk capital charge and slightly higher operational risk capital. The group, therefore, has excess capital of GBP 479.7 million, equivalent to approximately 68p per share. IFRS 16 will be adopted in the 2020 financial year, and we forecasted 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 remain highly liquid. GBP 426.8 million is in cash, and approximately half of the seed capital investments are in funds with better-than-1-month liquidity. The balance sheet FX exposure continues to be biased to the dollar. At the year-end, 79% of the group's financial resources were held in either dollar cash or dollar-denominated seed capital positions. Consequently, a $0.05 move in the key dollar to sterling rate implies a profit before tax impact of GBP 8 million.

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

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Thank you very much, Tom.

You've seen this slide from us before. We just kind of do this as a sense check on performance and how we're doing. We've got 1, 3 and 5 years here. And at a group level, I mentioned already, the 3-year numbers are at 94%, which is a satisfactory level. Five years are 89%. One year is at 73%, as you would expect in the last 6 to 10 months, probably. We've not performed as strongly as we had in the previous period. This is because of our process across investment themes. So from external debt through to multi-asset, we are looking to acquire [risk]. When we see sell-offs, and we think there's value, we'll continue to do that. It's our model. It's what we do. So still a very strong performance in the local currency in the multi-asset space. We're certainly relative to benchmark and acceptable performance elsewhere. We would expect that as we add risk in external and as we've added risk in blended and all these areas, we'd get -- we go through an election year, [reacquiring] risk at the right times with a model that outperforms in the next 2 or 3 years.

So in terms of where we are in EM, the fundamentals of EM are better than they were 5 years ago. I mean, if you look at the chart on the right, the table on the right, GDP growth is pretty consistent. It's moved around in the period, but it's pretty consistent there. Our current accounts are in better shape, kind of neutral. Share of world GDP is up 3%. Inflation is lower, doubling almost of the outstanding issuance of fixed income, for example. Spreads are wider than they were 5 years ago in the fixed income space, and there are more countries issuing. So as a proxy for some of the stuff that we do, obviously, fixed income currently is the biggest percentage of what we invest in. It gives you a flavor that we're in a bigger place that's doing better than it used to do, which is good. And the -- as we've discussed last year and in prior years, the EM countries responded pretty sensibly to the market environment that was ugly through '13, '15. They adjusted in macro terms. They've been educated like we have. They're very strongly committed to improving their countries and generally moving in the right direction. Little default action. Obviously, it's a lot of countries, and you're going to get some that are going to do worse and some better than others. Frankly, great. That's what we need. That's how we outperform everything, [brilliantly. We wouldn't be any bloody good], you wouldn't need us. So everything is -- the environment is, what I feel, is a good environment for us, where everything is beginning to perform differently because of different activities and coming down to fundamentals. So that's great.

FX, generally, in EM is softer than it was a year ago. So in relative terms, that -- particularly against the dollar, that's a good thing really. Certainly, the beginning of the year has been significant. That gives us value and things to do.

Reforms are happening in different places at different speeds. Not all of them are positive for markets. Again, that's good. Things are getting bigger. GDP growth is solid. And an environment where U.S. rates increase slowly is fine. This has been an election year, countless elections in EM this year. And that's all -- every single time, that creates volatility. And I think I've probably discussed this last time. So active managers have been cautious, I think, generally. So there are people with capital to spend, and we're getting to the end of the year. So the big -- last big election finishes in November, which is Brazil. And there's a Nigerian election in February, but that's of less significance to global EM. So we're in a position where we think we've got some value in the market, and we think we've got some people looking to do things in the last quarter. So that's interesting.

And this is a continuation of the same statement, really. So some people take some money off the table in the last 6 months or so. The -- such excellent returns over '16 and '17 equities are up 50%, so that was a time to take some money off the table. Interesting for us. We still had pretty good flow activity, as you all have seen from Tom's data. So -- and that, for us, tells us that more people are committed to the asset class as life goes along. And people will, if you like, top slice and add when they see value. And that's a good thing. So we're very happy with that. Investors are doing what we do, actually, which is great.

Obviously, developed markets in the U.S. in particular are big drivers of what goes on in EM. Nothing changes. It's been like that since I started 20 -- Christ knows how many years ago. Again, great. So we've got a new Fed chair. He seems relatively sensible. We've got a very aggressive tax cut in the U.S., which chugged a bit of petrol on what was going on anyway, but that's going to -- that's running out of juice. So it would be very interesting to see what happens to U.S. growth in Q1. So we've got a very interesting state really where the petrol is probably beginning to dissipate. So the bid for dollars, you've got to wonder if rates don't keep going up. And if inflation isn't strong in the U.S., it doesn't stay at current levels, what happens in terms of rates in the U.S. and U.S. dollar? So probably not a bad outlook for local currency in EM going into Q1 next year.

Terrible sentiment around certain things. The Turks are revolting. The Argentines have always been revolting. The English are equally revolting. And so that creates opportunity all over the place.

Big reset to valuations. I mean, we probably -- in equities and fixed income, we'll probably reset a year, maybe 2, in terms of value, which is quite nice. We're kind of post-U. S. election type values. And we've now -- if you look on the right, the graph there. We just -- it's for us, we just have to pick an asset class to give you a flavor. Local currency sees a lot of the vol rise conveniently as vol as equities, so it's quite interesting because equity has a corporate activity and local currency action in it. And if you look at relative value on the right chart, just picking up local currency real yields, this is net of inflation, obviously. So in 2008, we were at 200 basis points. We're now back at 300, which -- 2014 levels. So having had a nice, aggressive tightening through '17, it's widened again, and that creates a little bit of value for people to trade in. So we like that.

I think this is my summary. Pretty much what we said at the start. Good essay-writing technique, summary and beginning with all the same intro and conclusion. So active investment, we're producing outperformance. This is in a period where we would expect to underperform in a lot of things. We aren't really, maybe a little tiny bit in some of them, but outperforming in some, so we're very happy with our investment performance here. AuM growth has been good but [I think] in terms to gross and net. Clients are interested in what we do, and there's more of them, which is good, both institutionally and in retail. So we're getting some growth in retail. As I said, we would like to be much better in the U.S. But Europe and Asia, very strong retail growth, and we want to keep that up. The stuff we're doing strategically, the gaps that we want to fill in terms of growing the equity platform, growing the alternative platform, growing the local businesses, are all happening, which is nice. We keep trying to control our costs, which is always a challenge, obviously, but we like to try to do that where we can. And we're delivering good cash generation and solid growth.

So market weakness here is a pretty good thing for us. We think we can outperform from here, and we can attract cash from here. So we're in pretty good shape. EM is doing okay. Global backdrop's [worried]. That's quite good. Not everybody's running in, and everything is not levered in high price. So we like where we're at.

So I think that's probably it from me. Is there anything else we should be saying? We will throw it open to the floor for questions, comments, corrections. Thank you.

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Questions and Answers

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Christopher Myles Turner, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [1]

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It's Chris Turner from Berenberg. I'll keep it to 3 questions, I think. Firstly, on retail flows. That's been an area of retail where you've been looking to grow, I think, for some time. But this year, it feels as if something has changed. Can you give some more detail? Is that an improvement in distribution, an improvement in products? And then maybe, if you can just add some color on what that means for revenue margins going forward. Secondly, you had some very chunky mandate wins last year. But if I look at your segregated mandates as a percent of AuM, that's fallen from 67% to 61%. Can you just explain what's going on there with segregated mandates versus other types of vehicles? And then finally, Tom, I think -- and apologies if I'm (inaudible) here, but I think you said something along the lines of institutional flows are broadly unchanged over the summer months. Could you, perhaps, give some more color to those comments, please?

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

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You want to talk?

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Tom Shippey, Ashmore Group PLC - Group Finance Director & Executive Director [3]

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[So that] I can say -- the comment I was making was that the levels of activity and the tone of conversations that sort of ended the -- sorry, the financial year in June, broadly continued through July and August. So typically, we would expect things to get very quiet in July and August. It's not gone quite as quiet as ordinarily we would've expected. Particularly less, I suspect, relative to expectations in people's mind, given what happened in sort of late April and May in terms of the markets. Now some of that, I suspect, is because momentum in institutional flows can take a while to build up, and it can, therefore, continue a little bit longer. So the comment was, yes, really driven the tone of conversations, client interest as much as the flows' picture itself. On the segregated versus pool fund, so it's bit of a non-answer, but it is just the math. So -- that we have had some big institutional top-ups and new mandate wins equally in the broader base of flows' picture not just in retail but also some of the medium-sized institutional flows that will go into the pool fund product, as that chart on the flows' page showed. It was much broader based in '17, '18 than it was in '16, '17 with the mutual fund products picking up a decent share of the flow. So it's just working through the math.

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

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I think we've got product right for that, [playing it worth] private banking market. So a lot of money is coming that way into a mutual fund product. So it sort of touches a bit on your first kind of question, Chris, I think with products.

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Christopher Myles Turner, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [5]

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What about distribution channels?

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

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Well, yes. But the 2 are combined, really. Because if you've got a distribution who wants to sell X, and you're selling him X-squared, it's a bit harder push to get through the hole than if you give him actually X. Now part of it is that we haven't actually changed the product, but there's been a little bit of education. So in some places, certainly in the Asian space, we've been very good at picking up on what people want and how to structure it and doing that properly. So I think distribution channels, we've just exploited them better, particularly in the Asian space and in Europe actually. U.S., less, though it's been okay but not as good. U.S., we'd like to be a little better.

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Christopher Myles Turner, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [7]

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Just a follow-up. Can I possibly -- can you give some color on the margin differential of that retail channel as a rule of thumb versus the traditional institutional channel, please?

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

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It tends to be better for us.

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Michael Joseph Werner, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst [9]

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Mike Werner here from UBS. Two questions. First on the tax rate that you saw a little bit higher in the second half of this year. You mentioned geographical mix, and you mentioned some of your deferred tax assets. And I was just wondering, going forward, which -- what will be the sustainable tax rate? Or what do you think that will be? And then second, on the expense side, you guys have done an excellent job in terms of cost control. How low can you get that cost base? I mean, at some point, you're going to probably see some upward pressure.

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

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Actually, there's just going to be one of us in the room. We're not saying who. Go on.

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Tom Shippey, Ashmore Group PLC - Group Finance Director & Executive Director [11]

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So on the tax, so there are 2 impacts this year. I wouldn't say one is a one-off, but it's more likely to be one-off than the other. So the deferred tax movement, there are 2 drivers of that this year. One is the share price that we use to calculate the deferred tax asset for the offset of share vestings. Over the last year, I think it went from GBP 4.05 at the end of 2017 to GBP 3.70-something at the end of June '18. So that reduces the offset. That could reverse. It could be another -- I don't know, but that will potentially be another one-off, if that makes sense. The other impact...

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

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Another way is keep going. Just having a control line. It can't control that.

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Tom Shippey, Ashmore Group PLC - Group Finance Director & Executive Director [13]

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The other impact this year was in the U.S., where it's a consequence of the declining U.S. corporate tax rate. That reduced the value of the deferred tax asset in the states. That shouldn't -- it's unlikely to repeat again next year. The other effect is the geographical mix. There is now a larger proportion of our profits that are being generated in higher tax jurisdictions than the U.K. This year, we've got a 19% marginal tax rate in the U.K. I think I mentioned Saudi, Indonesia, Colombia, et cetera, all have slightly higher rates. My best guess, subject to the one-off adjustments, is somewhere slightly higher than 19% but probably lower than 19.5%.

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

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Yes. I mean -- but yes. I mean, it's a little bit like the cost thing. I mean, I think we're pretty efficient in terms of tax. And if we're good at growing our businesses offshore, tax has got to go up because they're much higher tax rates. But we can't tell you how much because we don't know how good we're going to be at growing Indonesia, growing in other places. But it won't -- but that's kind of a good increase in tax rate. So we'd be okay with that. In terms of cost, I mean generally, yes, we try and be efficient. We'd like -- our cost -- we always try and be efficient. That's continued to be our pattern. But it -- I would not expect huge reductions in cost from here. We're pretty lean here. And depending upon the nature of the business, you would expect costs could go up a bit because what's happening structurally is that if you can put it into a mutual fund complex, which is pretty broad now, that's unbelievably efficient. That's super scalable. Reporting is the same, presses, everything. That's great. Separate account business, as you win it, is a pain in the neck because it's very hard to make everything the same. So that's -- it's scalable but less so. So what has worked for us is having common IT platform, which the guys in the area have a done great job in terms of putting in, running it over the world. That makes us very scalable, which are pretty efficient there, but also having 3 centers in terms of everything that we do in our global operating model. So yes, I think we -- I don't expect us to become a high cost provider, but I'm not sitting there saying the thing I need to do to get better as a business is to kill my cost base further. I'm looking at trying to grow the revenue platform. I think that would be a fair summary, wouldn't you?

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Hubert Lam, BofA Merrill Lynch, Research Division - VP [15]

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It's Hubert Lam from Bank of America Merrill Lynch. Couple of questions. Firstly on flows. It seems like that -- correct me if I'm wrong, but most of the flows you've got this year were mainly from existing clients rather than new clients. Just wondering if that's true, and whether or not you expect that mix to change going forward?

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [16]

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No, I don't think so. I mean I don't have the exact data. But what we found this year, and we're certainly through to -- the financial year through to June. We were getting a -- well, in the mutual fund space, we're getting a lot of new client activity, particularly through wealth managers. A lot. Of course, they're an entity you've sold through before. And if you sell-through BAML, it goes through BAML, you're going to -- they'll tell you it's a new guy, but it's still BAML. So -- but yes, for me, that's a kind of new client. Actually, in institutions, we've been seeing a little bit of top-up from existing clients. But I would see -- say in these particular 12 months, there's been some long-term efforts in terms of marketing that have paid off in terms of some of the larger institutional, particularly in Asia, but also a bit in Europe and a bit in the U.S. So to be fair, we've seen new institutional business everywhere. So -- which -- actually, I would say more than one might have expected. So there's definitely a bit of new business mix, new client mix.

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Hubert Lam, BofA Merrill Lynch, Research Division - VP [17]

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Okay. Good. Second question is any issues around capacity, attributes to think about at this point in time or not really?

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Mark Langhorn Coombs, Ashmore Group PLC - CEO & Executive Director [18]

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It varies by strategy. So as a sweeping general statement, in alternatives, you're -- if you're good at it, you tend to be very local at it, so you're always concerned about capacity because these are not going to be big things on their own. So being strong in Colombian real estate, you're not going to manage $10 billion in a hurry there. But say you've got capacity to a limited amount, that means your margins are going to be higher, but you are going to manage -- you do see growth through the market. And if you see yourself very strong in the space, and we do, then you expect to be a category killer there. In blended fixed income, we have a huge amount of capacity. We just -- from one of my numbers before in terms of local currency, the market has doubled in the last -- whatever in terms of issuance, in the last 5, 7 years. We can maintain our market share and get twice as big that [way], and so I think we're fine there. The things where there are more likely to be capacity are the smaller act. And so things you would worry about will be, say, single country strategies, where it was a specialist or so. Let's say, I'm making it up, Bulgarian mid-cap. You think that might be a pretty narrow capacity. We don't have too much of that. One of the reasons we try and do global strategies is that we get bigger capacity opportunities. Things that we worry about, for us, capacity is all about performance. If we think we're going to have a performance problem if we get too big, we will -- [we won't stop] taking money. But in everything that we do, we have plenty room still. So even in some of the more esoteric strategies where we think we're very good in, say, Frontier equity or small-cap equity or Indian small cap, we will be in capacity all the time when we think we have plenty in a minute. Because in that particular space, we're small, getting bigger, but we have plenty of growth opportunity there. Where we had particular capacity issues in the past have been where we tried to do something new that's interesting, that hasn't given the diversification we want in, say, a fixed income category. So we did a pure inflation-linked bond product 6 or 7 years ago. It didn't really trade like (inaudible) bond product because it was -- we thought it was going to be broader than that. We still do them, but not in a dedicated product. So it's this point, let's shut it down. So we're on it. We think we have plenty of room to grow. We're not too [fussed] about that.

Anybody else? Is this good? Is this bad? Oh, thank God. My father is at the back. He's got a question. Dad, looking good, by the way.

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Unidentified Analyst, [19]

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Someone said (inaudible) the other day, but I...

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

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Actually, I was getting that. How is your finger?

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Unidentified Analyst, [21]

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That was a policeman. He put me [out]. The -- I just have a question, which is, I look at your AuM now, and it's pretty much where it was 5 years ago. You've just had a really good year from a client demand perspective. Your firm performance is good. But if I look at what's happened to industry AuM over that 5-year period in this space, it's grown quite strongly. So why do you think that you've sort of underperformed in terms of the industry over that period? Is that driven by your client base? Or what -- and how do you expect the next 5 years to pan out? Does what's happened in 2018 give you a lot of confidence that you'll be in a better place in the next 5 years?

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

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So to your question, I mean, I think markets generally mature. And if you -- active management, generally, people are always nervous about, and active managers are looking for other things to do that they can do actively. And what we do, you can do actively. In fact, not doing it actively is quite dangerous, just being in investment in what we do. Because indices are steadily less representative as you get more interesting in what we do. So I think we have -- since I started the business, I think the first statement I said to the people was, if we're any good at this, our market share is going to drop every year, but we're going to get bigger. Because we were such a big market share in a tiny market in 1992. So -- and that's true. Our market share in the fixed income space should drop every year. Now if we can get good in delivering the equity in terms of space, we should grow every year, so we're all in much better shape now in equities than we have been in terms of performance in the team. We're very happy with what we've got going and with the things we're offering. Beginning to see some traction. So the shape of what we do is changing. So the absolute number, yes, it will go down and go up with markets. But the trick is every time it goes down, it's got to get much bigger on the next cycle. We're going to be doing a lot more equity now and in the next 5 years than we were over the last 5 years. So that gives us room to grow in a much bigger market where, there, we should be gaining market share. There, we've got a market share gain to have as well as a market growth. So that's great for us. So I think that's one thing. I think other active managers run into the stuff that we did, so there are other people trying to take much -- so the bigger houses, I'm just going to make a name up. Say, Franklin or somebody may not have done something in a way that we did it in fixed income X years ago but has a very large sales machine that when they do, do it, can get product, can generate assets. And they're happy to take lower margin business, too. So that also gives us margin competition. But I think fixed income, we would expect market share to drop, but we should still do well if we perform. Our sales force are good. They need to get better. I need to get -- we all need to get better. So for us, it's keep doing what we do in fixed income. Make sure the sales are strong and the performance is strong. Try and maintain market share. If we get a bit more, fine. If we lose a bit, fine. If it grows, doesn't matter. In the equity space, we should be taking market share. There's a huge opportunity there. So that should give us better growth than we've had relative to everybody else. So we should be better than people in that space in terms of growth. In alternatives, depends on where you find the teams and what happens. And -- but in the local platforms, we were starting a lot them 5 years ago, and we're still trying to start 1 or 2 every year or 2. We're beginning to see some traction there. And as those demographics work and as we become top 5 or top 2 or top 1 asset manager, we should get very good volume growth from some of it if the demographies are right for some of those countries. So for example, in the Saudi or in Indonesia, if the demographic grows and that asset management grows and we're good at what we do in fixed income equity, we'll get significant growth there. So I would hope we're in better shape, if you like, than we were 5 years ago, where we had a lot of assets but from a very narrow space and a very narrow thing. But we now have got broader things to do. But the proof of the pudding will be in 5 years' time when you sit down and say "Hey, that was great," or, "Wait, what did you say?" We'll see.

Anybody else? Yes please, on the front here.

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Unidentified Analyst, [23]

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[Paul McGuinness] from [Shaw Capital]. In terms of you taking advantage of where you see price dislocations in various assets, would you ever consider applying that same logic to your own shares, should you get a period where sentiment was to be particularly weak? And then [it would apply to your own] price.

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

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Sure. We do, we do. We buy shares into the EBT because we're issuing them every year, so we haven't actually issued any new shares ever. We've always bought them in the market.

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Unidentified Analyst, [25]

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I was thinking above and beyond just for EBT purposes.

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

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We've got a fair amount to do there, but we'd be open to it. We did it before. I mean, in 2008, '09, we bought shares into the balance sheet when they were at GBP 1. We thought it was kind of crazy in the big crisis there. We would, absolutely.

Okay. Well, if there are no more questions, thank you very much for coming. We look forward to seeing you again in 6 months or so, and yes, thank you. Thanks very much.

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

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Thank you.