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Edited Transcript of PDL.AX earnings conference call or presentation 3-Nov-20 11:00pm GMT

·71 min read

Full Year 2020 Pendal Group Ltd Earnings Call Sydney,New South Wales Dec 1, 2020 (Thomson StreetEvents) -- Edited Transcript of Pendal Group Ltd earnings conference call or presentation Tuesday, November 3, 2020 at 11:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Cameron Williamson Pendal Group Limited - Group CFO * Emilio Gonzalez Pendal Group Limited - Group MD, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Andrei Stadnik Morgan Stanley, Research Division - VP * Ashley Dalziell Goldman Sachs Group, Inc., Research Division - Equity Analyst * Brendan Carrig Macquarie Research - Research Analyst * Edmund Anthony Biddulph Henning CLSA Limited, Research Division - Research Analyst * James Cordukes Crédit Suisse AG, Research Division - Research Analyst * Lafitani Sotiriou Bell Potter Securities Limited, Research Division - Senior Analyst * Matthew Dunger BofA Merrill Lynch, Research Division - Research Analyst * Michelle Wigglesworth Milton Corporation Limited - Investment Manager * Simon Fitzgerald Evans & Partners Pty. Ltd., Research Division - Executive Director of Diversified Financials ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the Pendal Group Limited FY '20 Financial Results. (Operator Instructions) I would now like to hand the conference over to Mr. Emilio Gonzalez, Group Chief Executive Officer. Please go ahead. -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [2] -------------------------------------------------------------------------------- Thank you, and good morning, everyone, and welcome to the Pendal Group 2020 Financial Results Presentation. As introduced, I'm Emilio Gonzalez, the Pendal Group Chief Executive Officer; and with me is Cameron Williamson, the Group CFO. What an extraordinary year it's been and extraordinary times as well. I trust everyone is in good health and reasonable spirits as we manage through this global pandemic. As a business, we have adjusted well, but there is still much nervousness and uncertainty. And we should not underestimate the human cost and toll that has been placed in society over the past 6 months, and this will continue for some time to come. As you'll see on today's agenda, we'll cover an overview of our financial year '20 results, followed by an update on the business, investment performance, funds and flows. I'll then hand over to Cameron to cover financials in more detail and close off with an update on the strategy before opening up for questions. So moving on to the results, which is on Slide 4, which is the FY '20 overview. Cash net profit after tax was down 10% on the back of average FUM, which was down 4%, and it is the average FUM during the course of the year, which is the key driver of our revenue. Base management fee margins were down slightly by 1 basis point with performance fees up to $13.4 million, up from the previous year's outcome of $5.9 million. Full year dividend is $0.37 per share, and it's down 18% from the FY '19 dividend. Importantly, our diversification strategy has underpinned the business, which has been resilient in the face of significant market volatility, particularly since March this year. It's been this diversification across different client types across different investment strategies and styles that has helped us navigate through what's been a unique period in markets. Fund outflows has been cushioned somewhat by inflows with good support from our institutional clients as well as flows in the U.S. wholesale channel. Investment performance has improved, and there had been some impressive returns that we've delivered for our clients at a time when active management matters most with a good portion of our funds under management now outperforming their respective benchmarks. In particular, I note the J O Hambro International Select strategy, which has delivered stellar investment performance. We've also seen an improvement in the J O Hambro performance fees, which were tracking GBP 21.1 million (sic) [GBP 24.1 million]. That's around about AUD 43.6 million. That's for the 9-month period end of 30 September this year. Now as I often do, I remind people, this number does move from month-to-month. It can be volatile, and we don't recognize performance fees on the J O Hambro performance fees until the end of December. And as usual, we will update the market in mid-January as to the outcome when we release our December quarter funds under management. We have stayed the course and have not compromised on the initiatives we believe will deliver growth. Despite COVID, we have recruited new investment team, launched new products, realigned our distribution model to be more effective, and investing in systems and technology to enable more efficient global operating model. COVID-19 has been a disruptive force, but it also highlighted the strength of our business and the value proposition we can deliver to our clients. Our investment performance has improved significantly. Flows have improved so too has performance fees, and we remain prudent on costs. But despite the tough environment, we are in a good position, and our financial strength allows us to be confident. Underpinning that confidence is the resilience shown due to our diversification of our portfolio. And Slide 5 is going to remind the level of diversification across the business in terms of our equity asset classes, geography, channel and currency as well. Global equities remains our largest asset class and represents roughly around about 37% of our funds under management. And this is then followed by Australian equities of around about 18%. U.K. and Europe is 12% with cash and fixed income at around about 22% of our portfolio. Our success in the U.S. means that it is an increasingly larger part of our portfolio, and it now represents 28% of our client funds under management, which is significant and highlights the importance of having a dedicated CEO providing leadership in that region. If we take a look at the funds under management by channel, our institutional book is now 41% of our FUM, which, although it's lower margin, can be more stable in periods like we've seen over the past 12 months. Westpac is 18%, although in revenue terms, it equates about half of that. And on the far right-hand side of the slide, we've shown you a breakdown of the currency exposure of the equities portfolio component of our business. As a reminder, the important thing here is where the FUM is invested, not where it is sourced from. So for example, a movement in the yen is almost as important to changes in FUM due to currency movements as a movement in the British pound. From a currency perspective, the best exposure to currency of our equity book is the Australian dollar and the U.S. dollar, which combined represents around a 45% of the total equities book. Turning to investment performance on Slide 6. The percentage of funds under management outperforming benchmarks has improved with FUM strategies outperforming quite strongly. Particularly pleasing is a diverse nature across our book of the investment strategies that have outperformed. I've already pointed out the stellar international performance or the performance on the international select strategy, this strategy sold specifically to U.S. clients. Its excess return over benchmark is 24% positive, and that's closely followed by some strong performance as well from our Australian MicroCap fund with excess returns of 23.8%. You'll also see that our range of Australian equity funds have continued to demonstrate their long, reliable track record, delivering north of 3% excess performance over the year. And we have seen a strong recovery in performance in the Asia ex Japan strategies as well over the past 12 months. In our stable U.K. strategies, again, the benefits of diversification, 2 of our U.K. strategies being the U.K. equity income fund and the U.K. dynamic fund have underperformed, particularly since COVID. But in contrast, the U.K. opportunities and U.K. growth strategies are performing strongly, in particular, U.K. opportunities fund, which has again proven to be a good diversifier and is now winning money. Our fixed interest funds have also performed well with strong excess performance in that category, particularly during the height of the COVID-19 volatility. At the half year results in May this year, I flagged that our robust business model and financial strength meant that we have the opportunity to use this period to our advantage; and to this end, our investment program in people, product, distribution, and our global operating platform has stayed on course. During the year, we expanded our global leadership team with the announcement of Nick Good in the U.S. He started in December last year. We now have a strong CEO leadership in our key markets, which has been a tremendous boost, especially during COVID. We've also recruited a new investment team that brings a new investment capability in impact investing, which expanded our product range as well as our [field] clients. We also continue to evolve our remuneration plans. One of our competitive strengths is our boutique business model that secures our annuity-style based management fees with remuneration schemes that rewards for value creation. A number of our managers are now in position to transition from the original schemes designed to reward growth in newly created strategies to long-term schemes to [deploy] established funds with a focus on retention. During the year, we've also realigned our distribution, launched new strategies, launched the Regnan brand globally, established new institutional fund vehicles in the U.S. and we also lifted the brand awareness amongst advisers in Australia with an award-winning digital brand campaign. Some of you may have seen us advertising on a digital space. Our global operating platform has also progressed well as we're looking to transition the back-office services away from Westpac. And we've now implemented a global HR system across the group and commenced the implementation of a global data strategy, which will generate significant benefits for the business and our clients. I'm very proud of the way the team has continued to carry out their work without missing a beat. In spite of the challenges of COVID that is thrown -- has been thrown at us. It hasn't been easy and required a lot of adjustment, but we have been up to the task. In terms of our response to COVID, our priority throughout this period, as you can imagine, has been the health, the safety and the well-being of our staff and their families. Employees continue to work remotely and follow government advice. In Sydney, we've seen a significant increase in staff returning to the office, while overseas conditions are more restricted. We -- as you've seen in the U.K., lockdown laws have been reintroduced and our U.S. employees mostly working from home. Importantly, we've seen no disruption to the management of our client funds. Our client engagement and communication has increased with the use of webcast, newsletters, sport pieces, a lot of information, keeping our clients up to date. And at all times, fund liquidity needs has been met. Our management of COVID response has been centrally led by our global Chief Risk Officer in London with the regional crisis management teams in Sydney, London and Boston. There's also been, I'm proud to say, close collaboration globally, where we've been able to benefit from each other's experience. Interestingly, COVID has accelerated a number of trends in the industry, many of which were already in place pre COVID. And this is particularly the case in the use of technology, the rise of digital marketing as well as an increasing focus on social responsibility and ESG. Now these trends are already in our thinking when shaping our strategy pre COVID. And if you recall, this time last year, I spoke of the need to increase our investment in technology and a strategic focus on ESG. This has become even more important given the direction of travel and the pace of change. And we've responded by accelerating our investment in data and technology, digital marketing and the global operating platform. I'll touch more on this in the strategy section later on. Looking at our FUM and flows, which is on Slide 10. Funds after management at year-end was $92.4 billion, which is down from $100.4 billion the previous year. The 3 factors were the main reason behind that. We have had outflows from our European strategies, which totaled $3.3 billion, and the bulk of the outflows was a combination of investors shifting out of European equities and underperformance in 2 of our key European strategies. There was a $2.6 billion in outflows from the Westpac book with 2 key transitions over the past 12 months, the lion's share being the ongoing corporate super consolidation program. There's also foreign exchange movements or the other factor detracting $2.3 billion. I will point out that weaker markets also detracted, but our strong performance in some of our key funds meant that the alpha generated from those funds offset the weaker market impact on our FUM. So it had a net positive impact if you look at markets and our investment performance to our overall FUM. Half-on-half, we did see an improvement in flows in the second half over the first half, which is interesting when you consider that the second half was over the COVID period almost entirely and the first half was pre COVID. And Slide 11 shows you the net outflows during the year on a quarterly basis with net outflows bottoming in the second quarter FY '20 and improved outflows in the third quarter and the fourth quarter of this financial year, particularly in the U.S. pooled funds. We also had strong institutional flows from new and existing mandate wins in that fourth quarter. I will point out in the institutional flows, it doesn't happen overnight. Some of those flows was as a result of strong engagement, and many of those flows were discussed pre COVID, held back by clients and then when the confidence returned, we maintained the engagement. And investors came back into the market, and we benefited from that. In OEICs, we saw improved trends on the back of reduced outflows from the European strategies, as we've seen investment performance in those strategies improve over the last 6 months. The Australian wholesale channel saw good momentum in the second half, posting 4 consecutive positive months of positive net flows in the back end of the year. I think this turnaround speaks to the hard work carried out by Richard and the team over the past 2 years, where they've been able to secure increased positions in model portfolios as well as our efforts in working closely on key client accounts and product development. We're starting to see some of those flows come through now as we've increased our exposure to our client base. And I'm proud to say it's being recognized more broadly with Zenith, an Australian research house many of you will be familiar with, naming Pendal as the Fund Manager of the Year. And that was done, I think, late last week, so we're proud of that. With that introduction and that overview, I'll hand over to Cameron to go over the financials in more detail. And then I'll come back and talk to the strategy and the outlook. Over to you, Cameron. -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [3] -------------------------------------------------------------------------------- Thank you, Emilio, and good morning, everybody. Look, I think it's a sound result in light of the environment that we've had this year. Our average funds under management did decline 4% to $94.8 billion. As a result, we did have mixed markets globally. The average level of the MSCI or country's [gold] index in local currency terms was higher, up 6% over the course of the year, significantly driven by the U.S. market with the S&P 500 up 10% on average. Other areas were more mixed. In Australia, the average level of the Australian market, as measured by the All Ordinaries Index was flat. And in the U.K. market, the FTSE 100 on average was down 9%, reflecting the conditions in that market as well. Average funds under management were adversely impacted this year as a result of outflows, and Emilio has touched on those in terms of the $6.5 billion that we did see. Fee revenue this year was down 3%; largely, our base fee revenue, which was lower on the average FUM and the contraction in the fee margins down 1 basis point. Performance fees themselves were up to $13.4 million, and that's up from $5.9 million last year, largely driven by the Pendal MicroCap fund, which had a very strong year in outperformance this year. On the cost line, expenses were 3% higher, up $8.3 million. It does reflect the investments that have been made in the business this year. A new investment team has been brought on. New products were launched. We have invested in our data and technology platform to enhance our global operations. All of that is reflected in the cost line, where we have more moderated costs on our BAU line. We did have some savings in our travel and broader costs associated with activity as a result of COVID. Fixed costs were higher. They're 4.7% higher. This is at the lower end of the guidance that was provided 12 months ago. As I said, we did pull back in certain areas that helped achieve that while continuing to invest in core strategic initiatives. Cash NPAT for the year was down 10% to $146.8 million, and EPS was lower 11% to $0.455 per share. Of that was the statutory result, which was 25% lower to $116.4 million. It was impacted by mark-to-market movements in the seed portfolio. This year, they were lower; and last year, they were higher. So there was about a $30 million difference in the movement of that portfolio. The dividend this year, the full year dividend is $0.37 per share, includes the final dividend of $0.22 per share. And the full year dividend is 18% lower than the same dividend of FY '19. Just turning to Slide 14, and we're just highlighting that we are amending our underlying earnings methodology from the 2021 financial year. Cash NPAT, our historic measure, has been our underlying profit measure since the IPO 12, 13 years ago, and it has served the business well since then; historically, has adjusted for certain employee-related expenses, which are no longer required going forward. Underlying profit after tax, which will be our underlying earnings, we'll not be adjusting for these items and will reflect the statutory employee costs, which are IFRS based and subject for audit. It does simplify our reporting and better aligns with market practice going forward. So from next year, UPAT will be our underlying earnings going forward. And we have -- in the appendices, we have got an appendix showing historic -- a history of what the UPAT would be over the last 5 years. Just on the fee revenue, Slide 15. It is down over the course of the year, down 3% to $474.8 million. The most significant movement this year has been in the wholesale channel. And that's largely as a result of lower fee revenue coming from the OEICs as a result of the outflows and in particular, the European strategies driving that. Westpac revenue also declined by $7.2 million, not surprising given the runoff in the legacy book in a number of the corporate superannuation transitions that we have had in the last 18 months. Performance fees were higher by $7.5 million, and as I said, the MicroCap fund here in Australia are the key driver behind that. And pleasingly, the institutional revenue, despite the volatile year, has grown year-on-year, a pleasing outcome. That's up $1.6 million versus last year. Just turning to the costs now. Slide 16 highlights how our cost base has moved over time including the relative split between our fixed and variable costs. Variable costs do move largely in line with revenue. Fixed costs are more steady. And you can see there, there's been steady increases each year as we have invested for future growth and diversification year-on-year. This year, our fixed costs were up 5% or $7.3 million to $157.5 million, while our variable costs were $141 million this year. That's at a 5-year low. It's really consistent with last year reflecting the lower revenue, albeit there's a bit of a mix in that with the slightly higher performance fees this year. Looking forward FY '21, in terms of next year, we are expecting fixed costs to continue to grow somewhere in the region of 8% to 10%. That's $12 million to $16 million, a number of additional investments that we're looking to make over the course of the next 12 months, where we'll be looking to increase our sales presence in both Europe and the U.S. We are boosting our digital marketing capabilities to underpin those sales efforts as well with a global lens. New products are also looking to be launched, particularly the global equity impact solutions strategy, where we have 3 vehicles that we'll be looking to bring to market. And in fact, we launched our first vehicle last week into the U.K. market. Investments are also being made in the operating platform and in particular, data and technology. This year, we have established a data team to drive that particular component of the strategy, and we'll be looking to migrate services onto one global platform over time. And Emilio will take you through that in greater detail shortly. In light of all of that, our statutory compensation ratio will be trending higher next year, up 2% to 3%. Statutory ratio will be reflected under UPAT going forward. Just turning to Slide 17 on the margins. The base fee margin is down 1 basis point, 48 basis points, not overly significant, but there is a slight -- couple of moving pieces to that. Driven by a slight change in asset mix as well as channel mix, our cash and fixed income portfolios as a component of our total book has grown from 20% last year to 22% this year. It is lower margin relative to the rest of the equities book. And the wholesale channel in U.K. and Europe has declined from 19% of our total FUM as at the end of last year to represent 13% this year. And again, this is a higher-margin channel for the group, and it is a lower component of our total portfolio as at this time. However, the fee margins themselves, ex cash and fixed income, have been holding up. You can see there that 58 basis points is reasonably steady over the last few years. The wholesale channel margins are also reasonably stable at 71 basis points, where the growth in the U.S. market is supporting that particular part of our book as well. The institutional part of our portfolio continues to grow as a percentage of the total fund. You can see it's grown from 24% 4 years ago to 29%. And Westpac as a component of our portfolio also has been declining and is now representing 9% of the total fee revenue of the group. Turning to the balance sheet on Slide 18, and it does continue to be dominated by our cash and seed investments, which totaled in excess of $400 million as at 30 September, representing substantially the net tangible assets of the business. Our seed portfolio as at 30 September is $200.4 million. It is down from 12 months ago, where it was $259 million. And during the year, seed investments totaling $132 million were retained. If you recall, we did close with strategies at the end of last year being the U.S. SMID and Global Smaller Companies strategies, and those particular strategies had significant seed in them. Substantially, most of that was redeployed. About $80 million of those -- of that was put back into a number of funds during the year including our Global Income Builder, OEIC, and also our global opportunities, U.K. OEIC. We did see off the back of that redeployment some good flows particularly coming out of Europe in the Global Income Builder as we're looking to bring that up to scale. You will note that our cash as at 30 September is $207.5 million. It is slightly higher than what we've historically had. Some of that is earmarked for further seed deployment. As I've highlighted, the global equities impact solution strategy, we're looking to bring 3 vehicles to market. The U.K. one is up and running. It was seeded last week. We have an Irish fund and an Australian trust we'll be looking to launch in this quarter as well, and some of that cash is being earmarked for that deployment. And the balance sheet continues to be a solid platform for growth as we embark on a multiyear investment program going forward. Just turning to Slide 19 on the dividend. A final dividend has been declared of $0.22 per share. That's 12% lower than the $0.25 dividend of last year. The franking is at 10%, consistent with the interim. The full year dividend of $0.37 per share is down on last year. It's about 18% lower. But it does sit within our payout ratio, 81% payout this year within our 80% to 90% range, which is pleasing. And looking at the franking levels next year, we are looking at somewhere in the range of 10% to 15%. The range is impacted, I would just highlight, by offshore performance fees. As we've talked to, the performance fees are currently trending slightly higher than this year, and so some of that will be fed into the franking levels. We don't retain surplus credits. They are paid out each year. In light of the significant investment program that we're looking at, the Board has reactivated the DRP. The historic takeup is not overly significant, and it does provide a level of support as we do that. And upon moving to UPAT for next year, the dividend policy has been revised, where we are looking to pay out 80% to 95% of UPAT going forward from the 2021 financial year. I would just highlight that, that range is consistent with our historic range of 80% to 90% under cash NPAT. Cash NPAT's more cash correlated, and that range sits in light of historic range under cash NPAT. As a reminder, I would just highlight that the dividend policy does exclude gains and losses on our seed portfolio. They are considered capital in nature and used to fund the future growth of the business and are excluded in -- under UPAT going forward. With that, I'll hand it back to Emilio who can take you through the strategy and outlook. -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [4] -------------------------------------------------------------------------------- Thank you, Cameron. Welcome back. 12 months ago -- if you look at this page now, I think, on Slide 21 of the pack, presented a strategy with a tagline that read, " the future is worth investing in," that's a tagline we launched as part of our marketing campaign here. Also at the half year, I spoke about remaining steadfast in our strategy. Our commitment and our belief in what we are doing has only got stronger. We see this unusual period as an opportunity. The strength of our business model, our robust financial position, which Cameron has just outlined, does provide us with the confidence to continue investing in our people, our global distribution, products, our technology platform to position the business for that next stage of growth. We've invested in talent, brought on new team. Also our remuneration programs continue to evolve, ensuring we retain our key people as well as providing the right environment, culture environment to perform. That reduces business risk and continues to deliver strong financial outcomes for our clients and shareholders. We are investing in the key growth markets, being the U.S. and Europe. And the task of transitioning the back-office services away from Westpac, whilst it represents a significant task, it also represents an opportunity to create one global operating platform that will deliver substantial benefits, and we also are looking to develop Regnan into world-class specialist ESG leader. Our heritage in ESG does span over 35 years, and we are well placed to grow in that segment of the market -- a fast growth segment of the market. We have strong credentials and product offerings in ESG that allows us to compete and gain market share. The latest report by the Global Sustainable Investment Alliance identified USD 30 trillion in sustainable investing across 5 major markets. And if anything, COVID has only accelerated this level of interest. Europe and the U.S. represents 85% of that market, followed by Japan, Canada and Australia. So the opportunity is offshore, and that underpins our strategy to launch Regnan globally in terms of the brand. And to capture this market, we've expanded and reshaped our ESG offering across the group, encompassing product offerings that include ESG integration, negative exclusionary screening, sustainable investing and impact investing. Under the Regnan brand, we've launched specialist impact strategy that builds on the Regnan expertise and deep knowledge in that space. That strategy was launched in London last week supported with our seed capital and was quickly followed with inflows from new clients. During the year, we also evolved the Pendal Australian existing ethical and sustainable strategies to better align with the recent needs of customers, and we've also seen the J O Hambro Global Select strategy run by the same team that runs the international strategy, which integrates ESG principles in its investment process. And a top-performing fund recently received a highest sustainable rating from Morningstar, a 5-star rating for sustainability. Now we see this as an exciting opportunity for us, and one that we believe we can succeed given our heritage and expertise and range of new products. It also means leveraging of a global distribution network to be able to maximize our sales opportunity. In terms of our distribution and our network, the U.S. and the Europe markets does represent the biggest opportunity for growth, is only because of the market size. And in line with the significant growth opportunity, we have realigned our distribution model under regional leadership to provide greater focus and accountability. Distribution and client relationships is becoming an increasingly important factor for success. This business, as many of you would know, is built around deep relationship with clients and also comes with performance, service, communication and engaging with clients on several levels. And to boost our distribution efforts, we are adding 9 additional sales personnel, dedicated sales personnel in the U.S. and Europe. And that represents a 30% increase on the current level. We'll also be adding to our marketing capabilities by adding digital expertise. The nature of the relationship with our clients is changing. Client relationships have historically relied on in-person sales as a primary driver of new business with client sales typically conducted in person often built around the availability of portfolio managers. However, as we've seen, clients' purchase criteria and their decision-making process is changing. Our clients now want to engage with us on their terms and increasingly embracing technology. A strong marketing capability, especially in digital engagement, integrated with the global data strategy will be much more important going forward in building sales and enhancing the overall client experience, particularly on a global scale. Hence, the need to support our distribution network with that capability. We will also be establishing an office in Continental Europe, which will be primarily a sales office. And that's increasingly important in light of Brexit. As a global business, we are now in a position to extract scale benefits. And in light of the transition away from the back-office services from Westpac, it is an opportunity to build a more global, scalable model that can deliver substantial benefits to shareholders as well as clients. That journey has already begun, but the heavy lifting will come over the next 4 years. It involves consolidating our back and middle office service providers, moving to one data warehouse, one trading platform, one analytics platform, which will result in a reduction of service providers. And within the project, we've identified up to 14 systems that we can potentially retire. Lower vendor costs, create a single operating model, reduce head count and in doing so, provide operating efficiencies across the business. It will require a one-off investment of between $15 million to $18 million over the next 4 years, but it also will deliver $4 million in annualized savings by year 4. It also comes with another -- number of other significant benefits such as reduced operational risk, improved productivity, fewer vendor relationships, as I've already pointed out, and easier processes, particularly in bringing on new teams onto the platform. It'll also free up a lot of time better spent on the business rather than processing. Not to underestimate, the improving the client experience also will be substantially better through quicker and more relevant client reporting. Furthermore, we anticipate savings of around $10 million per annum in lower fund expenses for clients, particularly offshore clients where fund expenses are funded out of the funds. And so it is an opportunity to rightsize our operations and in doing so, better position the business to support our growth in fund. So in summary, FY '20 result, it has been an extraordinary year, a year characterized by significant global macro events and one currently going on at the very moment, quite a big event as we're all well aware. The business has been proved to be resilient and reflects the breadth and combined with a strong balance sheet, good cash flow and a dividend yield of around 5.4%. It's interesting to note that in light of yesterday's reserve bank cutting interest rates to 10 basis points and a comment that rates won't be increasing for the next 3 years. I think that does demonstrate the intrinsic value in a world of 0 interest rates. We've also seen some momentum to rebuild around investment performance, new products, new institutional mandates with the investment strategies performing strongly attracting flows. As I mentioned earlier, we're very pleased to start to see the recognition in the Australian market being the fund manager of the year. Our starting FUM for next year FY '21 is 3% lower than the average, but markets move around quite significantly these days. Our performance fees, as I've mentioned for the 9 months, is tracking at GBP 24.1 million, also can move around. And for FY '21, UPAT will be our preferred measure of underlying profit. We do see significant opportunity in certain areas in specific areas, notably ESG and impact, where we want to lead here. So we are investing where we believe we can win and support that with our broader and more effective distribution network. Fixed cost guidance of next FY '21 is 8% to 10%, and that supports our investment in the long-term strategic initiatives that will be able to support fund growth of over 50% over the next 5 years through investing in talent, distribution, new capabilities, data and technology. And we believe, combined, it'll deliver a better proposition for clients, increase scale and adds to the diversification of our business. So with that, I will pause there and have the line open for question, of which Cameron and I will be more than happy to respond to any questions you may have. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Ed Henning from CLSA. -------------------------------------------------------------------------------- Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- Just 2 questions from me. Firstly, on the increase in costs. You've called out, obviously, today, increase in fixed costs, but then you've also called out a one-off investment of $15 million to $18 million over '21 to '24. Can you just talk about the cost growth going forward from this year and how elevated it will be to start off with? -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [3] -------------------------------------------------------------------------------- Yes. I'll let Cameron answer that. -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [4] -------------------------------------------------------------------------------- Yes. Are you referring to the cost growth beyond next year? -------------------------------------------------------------------------------- Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [5] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [6] -------------------------------------------------------------------------------- Yes. Okay. Yes, look, the most significant uplift that we're going to have is next year in light of the 8% to 10% that we're looking at. Not a lot of those one-off costs are included in next year's number. There is -- the transition will happen over a longer period. So the component does include somewhere between $2 million to $3 million in terms of next year's one-off. But there is a bigger component next year around embedding longer-term costs into the business with these investments. So the sales distribution that we've talked to isn't a one-off. That will be an embedded cost going forward. And also more on the platform cost, we've got to spend a bit to get a bit out to get those efficiencies. So in terms of beyond next year, I would expect the fixed cost to cut trend down notwithstanding that some of it will be nonrecurring. But we -- next year is really the bigger uplift that you're likely to see in that space. -------------------------------------------------------------------------------- Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [7] -------------------------------------------------------------------------------- Okay. That's helpful. And then just a second one in thinking about your increasing FUM, 2 parts to this. One, you had a very strong fourth quarter. Can you just touch on what you're seeing in the pipeline at the moment? And then secondly, you've talked today about a large increase in -- or 50% increase in FUM over 5 years. Is this predominantly coming through from the ESG funds? Can you just give us a little bit of insight on where you think the growth in FUM over the medium term will come from? -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [8] -------------------------------------------------------------------------------- Yes. Look, in terms of the trends that we've seen, putting aside institutional because we did have a -- as I said earlier, a period in that quarter where we added about 3 or 4 significant mandate wins as a result of 12 months' work and they came through. And I think it came through that quarter because clients did hold off [for] market's improvement of confidence. So I don't anticipate that institutional flow going forward and although there's pipelines in the next [12] months that we're confident of winning and more into institutional fund flow. On the wholesale, the Australian market is pretty much in line with the trends that I've called out earlier. We definitely have seen a improvement in trend. As I said, we had 4 consecutive months of positive flows. And also, just bear in mind that last year, we had about $400 million in outflows from a maturing product that's put in place 3, 4 years ago. And so the underlying trend is probably higher because we've got that seed product, and we had about $400 million in outflows. I mean that -- offshore, pretty much in line in terms of the OEICs and the wholesale. You saw that the OEICs did improve but was still negative in the third -- fourth quarter. I'd say that those sort of -- net of those flows are probably in line with what we've seen historically. -------------------------------------------------------------------------------- Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [9] -------------------------------------------------------------------------------- And then just the outlook on your medium-term [cycle]? -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [10] -------------------------------------------------------------------------------- Yes. Look, in terms of the 5-year outlook, we do have a good portion of our growth, as we look forward, coming through ESG and RI. And that's a result of 2 years' work to get to where we get today -- we've got to today. And as I said earlier, we were already on track to build a business, recognizing the trend. And if anything, that trend have been accelerated with COVID. We've got regulations coming in Europe. We've launched Regnan probably at the right time. And the product has received good interest in the U.K. We're launching it here in December. We're getting some institutional clients around that as well. In that thinking as well, we also have factored in extension strategies, which we believe we can launch and also new teams within that specialist brand, which we're already getting different levels of interest and discussions going through. Also in the Australian market, we've reshaped our ESG offerings. That one's under the Pendal brand, the ethical and sustainable funds. And we're starting to see -- so they're more positioned -- the ethical fund was launched in 2001. And we've reshaped that in line with the more current needs, and we're starting to see increasing level of interest. So that's definitely an important driver around that. Notwithstanding that, we're also seeing a good interest in the funds that were performing well at the moment. -------------------------------------------------------------------------------- Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [11] -------------------------------------------------------------------------------- Okay. And just one follow-up on that just on the ESG. Do you think it'll be a slow burn and really kind of pick up pace over a 2- to 3-year period? Or you start to see good interest now. You're going to continue to see flows come in reasonably quickly? -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [12] -------------------------------------------------------------------------------- Yes. I think there will be -- on some of the new strategies, there will be an initial interest because we've been building up to it. And then maybe flatten out and then you get a second wave of interest coming through as performance picks up. I think on the Australian side, it will be -- we've just made those changes. We're in the marketplace. That'll be more of a -- not sure a slow burn but that will be gradually increased over the next 2 to 3 years. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Your next question comes from Simon Fitzgerald from Evans. -------------------------------------------------------------------------------- Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Executive Director of Diversified Financials [14] -------------------------------------------------------------------------------- I'll just leave you with 2 this morning. The first one, last year, you gave out a slide that shows as at the 30 September 2019, I think, it was 25.7 billion out of a total of 26 billion of FUM that was exposed to the performance fees that I think was trading -- or at least performing 0% to 10% below its high watermark. Just wondering if you could just sort of give us a feel in terms of the spread of what that would look like at 30 September 2020. And just to clarify that I'm looking at Slide 34, right around about 22% of your FUM at this -- or at least at 30 September 2020 is trading above its high watermark. -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [15] -------------------------------------------------------------------------------- Yes. Cameron? -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [16] -------------------------------------------------------------------------------- Yes. Yes, Simon. Yes, look, we do have that slide in the back. You can see Slide 34 that has the various funds that are above their high watermark and those that are below. So you can obviously can capture that. In light of where things are at relative to where they were last year, I think we've certainly got more strategies above the high watermark than what we did 12 months ago, and you'll see that, obviously, with the status of where performance fees are at. But it is quite narrow. In terms of the number of strategies, not quite where we'd like it to be, but those strategies actually have [all]. Yes. Yes. -------------------------------------------------------------------------------- Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Executive Director of Diversified Financials [17] -------------------------------------------------------------------------------- [All] strategies. Yes. -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [18] -------------------------------------------------------------------------------- Well, there were also some mandates as well. So within those mandates, some of those strategies have performance fees, which are quite material. So that's come through as well. Look, I guess we do have a number of funds that are pushing that high watermark. I would say it's a fairly similar level to last year. The mix of those funds has changed so last year, 12 months ago, some of our larger U.K. funds were pushing the high watermark. They've had more difficult years this year, and they're probably a little bit below where we'd like them to be. Some of the other funds that were struggling 12 months ago have had really, really strong performing years, and they've pushed back up towards the high watermark. So the mixture of that would have changed, but actually, the nature of it is probably quite consistent in terms of the percentage. -------------------------------------------------------------------------------- Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Executive Director of Diversified Financials [19] -------------------------------------------------------------------------------- Okay. Just one other question. Just in relation to the $15 million to $18 million of one-off expenses between '21 and '24, it sounded by your rhetoric that you're going to expense those. And so just to clarify, they won't be treated as one-offs outside the underlying net PAT, the new measure that you're looking at? -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [20] -------------------------------------------------------------------------------- No, that's right, Simon. What we would do is just call them out each year as sort of the nonrecurring nature, but we'd certainly include them in our UPAT. We wouldn't exclude it. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Your next question comes from Matt Dunger from Bank of America. -------------------------------------------------------------------------------- Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [22] -------------------------------------------------------------------------------- If I could go back to the 50% plus FUM growth over 5-year target, can you talk us through what you're assuming for Westpac legacy funds under management over that 5-year period, also the open-ended investment companies and what sort of level of investment returns are factored in there? -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [23] -------------------------------------------------------------------------------- Yes. We've got outflows on the Westpac. We certainly haven't sort of make any assumptions that, that will turn around. So the legacy book runs off at roughly around about, I think, 5% to 10% per year. -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [24] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [25] -------------------------------------------------------------------------------- Slowed down over the years. -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [26] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [27] -------------------------------------------------------------------------------- And we've continued to be conservative in our forecast there in terms of the runoffs, conserving as in we're reasonably aggressive in terms of the numbers. And the OEICs, we've had forecast in their continued outflows in some of our U.K. strategies where performance is down, offset by recent wins in U.K. ops from that perspective. Global Select, we've seen a pickup given its performance. Some of those flows have mainly been in terms of our forecasts coming out of the U.S. The funds we sell in the U.S., I think something like 80% of the funds we saw are top quartile -- top second quartile with 4- and 5-star ratings. So a good portion of our thinking around that is that the U.S. will continue to be an important part of that growth. Now these things change over time of course. But where we have the flows are in predominantly those funds that got strong performance in the first and second quartile. And those funds, we've -- in the fourth quartile, we -- were also factored in our flows through that as well. And as I mentioned earlier, we've also got our thinking around the different ESG strategies, extension and potentially new teams in, say, years 3 and 4. -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [28] -------------------------------------------------------------------------------- So -- and also, Matt, I'll just add, in terms of the fund growth, I think you referred to what's our assumption around sort of market growth. -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [29] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [30] -------------------------------------------------------------------------------- About -- yes, about 40% of that FUM growth will be linked to market. About 60% will be organic flow. So it's weighted towards organic growth as opposed to beta driving that. -------------------------------------------------------------------------------- Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [31] -------------------------------------------------------------------------------- Okay. That's very helpful. And if you could talk to -- is there any chance you could talk to the channels that are expected to grow in this 5-year outlook, so we can get a sense of front book versus back book margins on wholesale versus institutional? -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [32] -------------------------------------------------------------------------------- Yes. Institutional, as you know, is quite difficult. Not a great deal in the next 12 months. We do have a pipeline and -- but building up. Again, the U.S. pooled vehicles are more prominent in their growth profile and also improvement in the U.S. Wholesale. The OEICs in U.K., Europe is reasonably balanced still for the next 12 months but some improvement further out. -------------------------------------------------------------------------------- Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [33] -------------------------------------------------------------------------------- So fair to assume that this additional incremental FUM that you're putting on the platform is growing at a wholesale margin, is more skewed towards the wholesale margin. Is that fair versus institutional? -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [34] -------------------------------------------------------------------------------- It will be a mix, Matt. We've got -- it's probably weighted towards the wholesale margin, but we do know there's a bit of compression out there on the platforms as well. So we've factored in some longer-term fee revenue pressures. But having said that, in terms of the nature of the product, it's a bottom-up build based on products, the new products that we're thinking about. Some of those are weighted towards the institutional and wholesale channels. But by and large, we think more will come through the pool funds over that 5-year period. -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [35] -------------------------------------------------------------------------------- Yes. The other factor to add to that, it is more weighted to wholesale than insto, and we've also factored in some ongoing margin reduction. If you look at the strategy, we are opening up a European office. We're realigning our sales and putting a presence of FTE on the ground in Continental Europe. So we have factored in not in the near term but in the medium to long term, improved market share, particularly with the launch of ESG products and then quite highly favored across Europe in the European part of our growth strategy, Continental Europe. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- Our next question comes from Lafitani Sotiriou from Bell Potter. -------------------------------------------------------------------------------- Lafitani Sotiriou, Bell Potter Securities Limited, Research Division - Senior Analyst [37] -------------------------------------------------------------------------------- A couple of questions if I may. The first is in relation to the overall number of strategies and investment staff you have, but there's been a few new set -- funds flagged, but also, you've closed a few. Can you give us an idea of the trend over the last year and what you would expect over the next year not only in terms of overall strategies but also total investment staff so we can actually put some numbers to the additional investment that's going on? -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [38] -------------------------------------------------------------------------------- Yes, investment staff, the rule change over the last 12 months has been the impact team. So that's been a head count of 4. They've started progressively between March and June of this year, and obviously, there's a full year impact coming in over the course of the next 12 months. The -- so that's been the main one. We did have a reduction in investment staff in the numbers because we closed the U.S. SMID. And really, what we did there, Laf, is where we weren't getting traction and using our seed capital, which was U.S. SMID, we reduced and cut that and effectively replaced it with much more strategy that we believe has got more promising prospects as with the impact team. And so there's 4 additional there, but there was 3 reduction in the U.S. SMID. There's been 1 or 2 head count. We've added support in 2 strategies in Europe. Really, that's been the only change. Going forward, any change you'll see, it will be either new teams and rather than addition to the existing. Our [staff to] now investment management, I think is 2% over the last 5 years. And in terms of new funds, we closed the U.S. SMID as I said. We've also closed one of the emerging markets in the OEICs last year, and the [aged] fund in the mutual fund. We are closing a number of seed funds. We've done an exercise of how we can -- where can we reduce our fund vehicles that's not being supported. And so we've gone through that exercise and reduced the number of fund vehicles. We did launch 2 new ones in the U.S., and that's mainly for the institutional market. A smaller amount, they want mandates but they want to go into mutual funds, they go into these other vehicles, which is sort of the middle market in terms of co-mingling funds. And -- but that's already received funds when we launched the -- the Global Select strategy was missing money because we didn't have a vehicle to get smaller institutional amount. And so outside of that, any new fund strategies will be either extension strategies or again, new teams coming onboard. We did launch the credit fund in the U.S., which is an expansion strategy out of the Global Income Builder. That was launched in August of this year, and that's a sleeve out of the credit component of the Global Income Builder, which is equities, credit and cash. And we did have a bit of interest from clients saying, "I just want to buy the credit component. Would you look at sort of splitting that out?" And we've done that. -------------------------------------------------------------------------------- Lafitani Sotiriou, Bell Potter Securities Limited, Research Division - Senior Analyst [39] -------------------------------------------------------------------------------- And roughly, how many overall investment staff would you have at the moment? And roughly how many strategies across the business? -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [40] -------------------------------------------------------------------------------- Investment staff is -- I think I'll just grab that number for you. -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [41] -------------------------------------------------------------------------------- [I think something in the range of about] 70... -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [42] -------------------------------------------------------------------------------- 70 something, I think it is. -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [43] -------------------------------------------------------------------------------- Yes, high 70s. -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [44] -------------------------------------------------------------------------------- I know them all by name, but I can't tell you exactly the number, Laf. It's 85. -------------------------------------------------------------------------------- Lafitani Sotiriou, Bell Potter Securities Limited, Research Division - Senior Analyst [45] -------------------------------------------------------------------------------- 85, yes? -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [46] -------------------------------------------------------------------------------- 85, yes, across the whole... -------------------------------------------------------------------------------- Lafitani Sotiriou, Bell Potter Securities Limited, Research Division - Senior Analyst [47] -------------------------------------------------------------------------------- And strategies. -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [48] -------------------------------------------------------------------------------- Yes. And strategies -- well, strategies in Hambro is 25, 26. In Australia, there's a lot more than that because we've got historical strategies. But there is -- 1 strategy could have 5 or 6 different people. You've got unit trust with obviously mandates linked to that. We've got seed of funds. It's a much more complex business. If you recall, going back to 15, 20 -- we've got strategies that have been going for 25, 30 years. -------------------------------------------------------------------------------- Lafitani Sotiriou, Bell Potter Securities Limited, Research Division - Senior Analyst [49] -------------------------------------------------------------------------------- I guess, open strategies. -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [50] -------------------------------------------------------------------------------- Sorry, what was that, Laf? -------------------------------------------------------------------------------- Lafitani Sotiriou, Bell Potter Securities Limited, Research Division - Senior Analyst [51] -------------------------------------------------------------------------------- I guess open funds in Australia [roughly]. -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [52] -------------------------------------------------------------------------------- Open funds is about 35, 38 just if you look at the PDS and then how many we've got in the marketplace, that includes cash fixed income, obviously the equity is about 30s. -------------------------------------------------------------------------------- Lafitani Sotiriou, Bell Potter Securities Limited, Research Division - Senior Analyst [53] -------------------------------------------------------------------------------- All right. Great. And just one follow-up, final question, sorry. In relation to COVID, some other companies have actually specifically called out some COVID-related expenses from moving staff [outside] and other systems and so forth. This is the first full period. I guess last 6 months was full COVID period. Are you able to call out any specific costs that you guys incurred over the last period, 6 months? -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [54] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [55] -------------------------------------------------------------------------------- Yes. I mean, Laf, you're right. There was a slight uptick in our IT and sort of support costs associated with that, obviously, people moving remotely. And that was in the hundreds of thousands of dollars. It wasn't -- it's not in the millions. And that was clearly dwarfed by the savings that we had elsewhere throughout travel and entertainment and some of the conferences and things like that. So net-net, there was lower cost. That's why we didn't call it out. But in terms of getting the business to, I guess, a COVID operating state, we probably spent somewhere in the region of $400,000, $500,000 at, I guess, in terms of getting the platform established to work in the current environment. -------------------------------------------------------------------------------- Lafitani Sotiriou, Bell Potter Securities Limited, Research Division - Senior Analyst [56] -------------------------------------------------------------------------------- Well, so roughly net neutral overall. -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [57] -------------------------------------------------------------------------------- No, net savings overall. Our overall savings across -- the travel alone was probably down $3 million to $4 million this year. So from a COVID perspective, there were more net savings than net expenditures. Where our expenditure and the cost growth came this year was more around the strategic initiatives around teams, platform, et cetera, et cetera. -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [58] -------------------------------------------------------------------------------- Yes. Within that... -------------------------------------------------------------------------------- Lafitani Sotiriou, Bell Potter Securities Limited, Research Division - Senior Analyst [59] -------------------------------------------------------------------------------- Thank you for that. -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [60] -------------------------------------------------------------------------------- Go ahead, Laf. -------------------------------------------------------------------------------- Lafitani Sotiriou, Bell Potter Securities Limited, Research Division - Senior Analyst [61] -------------------------------------------------------------------------------- Sorry, go ahead. -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [62] -------------------------------------------------------------------------------- No, go ahead. -------------------------------------------------------------------------------- Lafitani Sotiriou, Bell Potter Securities Limited, Research Division - Senior Analyst [63] -------------------------------------------------------------------------------- I was just saying thank you for that, but if you've got something else, go for it. -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [64] -------------------------------------------------------------------------------- The other thing that you need to [refer] is the global data strategy. And so there's a period there where we will be looking at head count reduction. But in the last 12 months, we've added a team so far about 8 FTEs. We've got a budget of 10. And these FTEs sit in London, New York and Sydney, and they're all effectively data scientists managing data and working and putting all that data on one cloud base. That's been the other investment over the past 12 months. -------------------------------------------------------------------------------- Operator [65] -------------------------------------------------------------------------------- Your next question comes from Andrei Stadnik from Morgan Stanley. -------------------------------------------------------------------------------- Andrei Stadnik, Morgan Stanley, Research Division - VP [66] -------------------------------------------------------------------------------- I wanted to ask 2 questions. Firstly, around the conditions for flows in Continental Europe. Is some uncertainty over Brexit and COVID, is that still impacting the size and the nature of flows? -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [67] -------------------------------------------------------------------------------- Yes. Continental Europe is still a challenge. And I think with the recent lockdowns in Germany, France and also the U.K., I think it'll impact [them] as well. And so that's still -- flows did pick up. We have -- obviously our performance picked up as well, and that has helped. We're also in that category. European equities has been out of favor. So to your point, in summary, the flows in Continental Europe will probably continue to be facing headwinds in terms of what we're sort of walking into. And you got Brexit at the end of the year, which will continue to sort of start to gain the headlines, which already has been the case whether some form of trade agreement will be reached or not. -------------------------------------------------------------------------------- Andrei Stadnik, Morgan Stanley, Research Division - VP [68] -------------------------------------------------------------------------------- And I want to ask another question, kind of a very unpopular question. But what are your thoughts on the recent resurgence in M&A among asset managers globally? Do you think Pendal is well positioned? Do you have enough scale and specialist capabilities to grow into the future? -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [69] -------------------------------------------------------------------------------- Good question. There seems to be a bit of a flurry at the moment on that front. As people are looking for scale, margins, as you know, have been coming down aggressively. Interestingly, costs, everyone's looking at cost. Regulatory costs continue to increase, compliance, regulation. We're, even in the U.K., Europe, setting up new vehicles, setting up a structure to comply with UCITS ManCo. We're looking at setting up a method license firm as well, putting people on the ground. And now project teams, we've got the EU ESG requirements coming in, in March of next year, having to classify all our funds. So those costs aren't going away. And the M&A is, I think, being driven by the fact we're trying to get that scale. Our scale, we've got an opportunity to benefit from the work we're doing at the moment right across our business. We've been running 2 separate businesses for all the right reasons, but there's an opportunity to start consolidating the back office and the operating platform. And already, we're seeing our power to get much better negotiating deals with global systems providers, say, Bloomberg, FactSet, Salesforce. Where traditionally it's being done regionally, we've combined our buying power domestically, and we've already achieved significant savings by having one central source to negotiate with a much more sort of purchasing power behind it. So all that's going on here. M&A, I think it won't -- probably won't go away interestingly enough. We constantly get knocks on the door. I've said this ever since we've brought Hambro. We seem to be a good partner. But we're driven by the strategy. And as I've said in the past, acquisition for us is not the strategy. It's how we get there. And if something comes across our path that gets us there quicker, suits our strategy, fits in there, we'll always take a look as we have done in the past. So -- and also, I think we're a good partner given our distribution, strong balance sheet, access to the Australian market for overseas players that perhaps don't have access here. And we've also had good success in the U.S. mutual fund industry in the U.S. -------------------------------------------------------------------------------- Operator [70] -------------------------------------------------------------------------------- Your next question is from Brendan Carrig from Macquarie. -------------------------------------------------------------------------------- Brendan Carrig, Macquarie Research - Research Analyst [71] -------------------------------------------------------------------------------- Just 2 from me. First is just on those lower fund expenses for the clients of $10 million. Are any of those material on an individual client basis? And I guess can you provide any color as to whether that gets you more aligned with some of your competitors in terms of bringing those costs down for your clients? So will it work from a customer retention standpoint? Or can you leverage that into some customer acquisition opportunities? -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [72] -------------------------------------------------------------------------------- Yes. So offshore, particularly in OEICs, the fund expenses are paid out of the fund. And so when you look at the funds offshore, you have a management fee and then they have what they call OCFs, which is equivalent to our MER. The management fee for [argument's sake] may be 75, but the OCF may be 85, 90. And so what this will do is bring down the OCFs because we're reducing the fund expenses that we've been able to gain as a result of getting scale across the business and reducing back-office service providers as well. And that will -- and what clients look at is the all-in cost, and that's the OCFs. That would make us more competitive without having to reduce the management fee. The same in the U.S., and we currently have funds that incorporate -- the expenses are charged by the fund. And we'll also get benefit to the client at a top level, which I think puts a bit less pressure on the actual management fee itself. So from that perspective, at a high level position, they will position us a bit more competitive in those markets. -------------------------------------------------------------------------------- Brendan Carrig, Macquarie Research - Research Analyst [73] -------------------------------------------------------------------------------- Okay. And then the second question I had was just on the comp ratio increase. So just a bit more color on the composition of that. I assume it's partly from the performance fee accrual given the 50% flow-through. So that's a part of it. But just on the remaining component that's driving that increase, a bit more information please. -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [74] -------------------------------------------------------------------------------- Yes. So on the comp ratio, Brendan, it's a combination of fixed and variable. So it's an all-in ratio, and it does factor in the higher performance fees. Just a reminder, on the performance fees, not 50% -- whilst that's a sharing arrangement with the team, as we transition to UPAT, not all of that will go through next year, right? So it is a -- because there's a vesting profile associated with the deferral that will be spread over multiple years. So the way it works is, at the moment, probably only about 3/4 of that will be fed into the number for next year as opposed to the full 100% of the share, if you like, of that performance fee. The rest of it will come in future years. So yes, significant part of that 2% to 3% is the performance fee. Another component is really the investment in the sales team that you referred to, the full year effect of having the impact team on -- that we've talked to as well. And obviously, we do have a number of project staff assisting with the broader platform build-out, which, obviously, we're going to have some of that built into that comp ratio as well. So it's a combination of all those 3 effects. -------------------------------------------------------------------------------- Operator [75] -------------------------------------------------------------------------------- Your next question comes from Ashley Dalziell from Goldman Sachs. -------------------------------------------------------------------------------- Ashley Dalziell, Goldman Sachs Group, Inc., Research Division - Equity Analyst [76] -------------------------------------------------------------------------------- Just a few questions for me. Maybe starting with the performance fee, the 44-odd million that you've called out to September 30. Just hoping you might be able to give us a sort of more spot like view of how that's tracking at the moment. -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [77] -------------------------------------------------------------------------------- Yes. Look, that, as I said, moves month to month. We only update for the 9 months. And then the next update is not until January actually, so outside of that, we'll really have not much further to add. -------------------------------------------------------------------------------- Ashley Dalziell, Goldman Sachs Group, Inc., Research Division - Equity Analyst [78] -------------------------------------------------------------------------------- Okay. Maybe you could... -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [79] -------------------------------------------------------------------------------- If you wanted to, what you could do, to give you sort of a sense of guidance, is we do release factsheets, fund factsheets every month. And if you got a sense of the funds that are driving that performance, if you look at probably Global Select, U.K. ops... -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [80] -------------------------------------------------------------------------------- And International Select. -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [81] -------------------------------------------------------------------------------- And international select, that's all in the U.S. If you track those, you might be -- get a sense of potentially how that could be tracking, and we do release those every month. -------------------------------------------------------------------------------- Ashley Dalziell, Goldman Sachs Group, Inc., Research Division - Equity Analyst [82] -------------------------------------------------------------------------------- Okay. Great. Maybe you could help then just off the 44 million, can you give us a rough sense of the mix of kind of mandate versus fund level fees? -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [83] -------------------------------------------------------------------------------- Yes. The bulk of that will be in the mandates. That's why when you have a look at the -- I think we've got it at the back of the pack slide. Slide 34 has the fund sizes that are capable of performance fee. You can see there Global Select is the biggest one. So that's obviously in performance fee territory. You can see where that's tracking. And the U.K. opportunities fund is also in performance fee territory. They're the 2 that are driving it. But behind that, as Emilio just said, is we do have some mandates, and they're largely in the International Select. The mandates are in the pooled vehicle, but we have what's called the Delaware Statutory Trust, where we have some smaller instos that we price separately in that trust. So they're the 3 strategies you need to focus on. The makeup of it is probably weighted towards the International Select strategy. It's captured in that mandate section, but the fund size also gives you good understanding of where it currently sits. -------------------------------------------------------------------------------- Ashley Dalziell, Goldman Sachs Group, Inc., Research Division - Equity Analyst [84] -------------------------------------------------------------------------------- Yes. Okay. Just on expenses, just going back to Ed's question, the $15 million to $18 million one-off cost that you've flagged, just so I understand it correctly, you're suggesting only $2 million or $3 million of that rolls up into your 8% to 10% fixed cost growth guidance for '21. Is that right? -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [85] -------------------------------------------------------------------------------- Yes. That's right. That's right. The bulk of it will come in -- This is a 4-year program that we're looking at. And within that $18 million -- this is the incremental. There are other costs. The $4 million is a net number. There are other costs that we are bringing into the business to get that $4 million out. But the $15 million to $18 million represents, I guess, the one-off nature on top of that beyond -- that will actually drop away at the end and that next year is really probably the start of that project. $2 million to $3 million is the number that we're working towards for next year. -------------------------------------------------------------------------------- Ashley Dalziell, Goldman Sachs Group, Inc., Research Division - Equity Analyst [86] -------------------------------------------------------------------------------- Okay. The profile of how that $15 million to $18 million will fall through kind of beyond '21 then, is it going to be pretty evenly spread? Or is there a bigger pickup in '22? -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [87] -------------------------------------------------------------------------------- Well, we're actually going through a broader RFP process at the moment. And the timing and the sequencing of how that plays out, we'll have a better idea in 6 months' time. I would think the bulk of the heavier lifting will be done through FY '22 and '23 to be honest. That is where the heavier lifting and more of the offshore side of things. If you recall, we are getting some support here domestically through Westpac. Westpac are supporting us as we migrate some of our services. We're starting with those first but then sort of tapping the Hambro back office into ours. That will happen more in those years, and some of those costs are really baked into that number. -------------------------------------------------------------------------------- Ashley Dalziell, Goldman Sachs Group, Inc., Research Division - Equity Analyst [88] -------------------------------------------------------------------------------- One final one for me. The $4 million of annualized savings, you suggested you kind of hit that at '24 if all goes to plan. Do we assume that there'll be some level of benefit below $4 million maybe in the '22 and '23 years? Or does it really all come at the back end? -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [89] -------------------------------------------------------------------------------- There will be pieces of it as we progress through it. The efficiencies will come at different times. There will be efficiencies earlier than that, but the full effect of that won't be felt until -- probably will take 4 years out to FY '24. So yes, the $4 million will happen at the end, but there'll be components of it built in along the way. -------------------------------------------------------------------------------- Operator [90] -------------------------------------------------------------------------------- Your next question comes from Michelle Wigglesworth from Milton Corporation. -------------------------------------------------------------------------------- Michelle Wigglesworth, Milton Corporation Limited - Investment Manager [91] -------------------------------------------------------------------------------- Only one question for me. With the decision to increase the sales force by 30%, I was just wondering if you can let us know the thought process that went behind this because some could argue that with COVID, it's an even more uncertain world now. So could you just let me know the decision process about increasing sales force at this time? -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [92] -------------------------------------------------------------------------------- Yes. There's probably 2 key drivers behind that. One is Europe. We've got no presence in Europe, an on-the-ground presence. And if we want to participate in that market and grow it and be able to sell our products, particularly the ESG products we're coming out in the market, we need people on the ground. And so that's a head count of 3. And so the percentage numbers may seem high, but the head count actually -- our [full] sales force in Europe is about 15, so 3. And so that's expanding into a territory we already have exposure to but don't have a presence. And if we want to continue to grow that and service our clients, we definitely need a presence on the ground, particularly with Brexit. In the U.S. with Nick coming onboard as well and putting a lot more focus around it, U.S. is a big market. We've got a sales force of, I think, about 11 -- 11, 12 and covering the whole of the U.S. market. And given that a lot of the funds we sold in the U.S. are predominantly first and second quartile, we've added resources there because we feel we can get a much more greater breadth, much more greater coverage and raise money as a result of that. So that's another 3 head count coming through there as well. And that was the basis behind it, Michelle. We wouldn't be doing it unless we feel we could raise more additional funds than what we're currently doing. -------------------------------------------------------------------------------- Operator [93] -------------------------------------------------------------------------------- Your next question comes from James Cordukes from Crédit Suisse. -------------------------------------------------------------------------------- James Cordukes, Crédit Suisse AG, Research Division - Research Analyst [94] -------------------------------------------------------------------------------- Look, just a couple of questions on the FY '25 FUM target. I mean, there's things you can control like flows, and there's things like markets, which you've got less control. Interested in why you decided to issue a FUM target maybe than a more measurable flow target. And I guess following up on that, Cameron, you said 60% of the target is going to come from organic growth. Should we think about that as $5 billion flow a year? Is that the right way to think about it? -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [95] -------------------------------------------------------------------------------- Yes. James, I mean, you're right. 50% translates into roughly about [$50 billion], and 30 of that is organic. And 5 -- yes, [after 5 years] somewhere between $5 billion and $6 billion. It's not going to be a straight line. This will take time. There is an element of accelerated growth coming in, in the 2 to 3, 4 years out, but we are factoring in growth reasonably quickly as we build that presence. We're looking for traction reasonably early, but as we expand the products, we get our products out into those markets that we're investing in, we'll see that accelerate towards the outer years. But that's broadly the range that you need to look at. -------------------------------------------------------------------------------- James Cordukes, Crédit Suisse AG, Research Division - Research Analyst [96] -------------------------------------------------------------------------------- And Emilio, just interested in the decision to issue a flow -- sorry, a FUM target rather than a flow target. -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [97] -------------------------------------------------------------------------------- Well, there's 2 things. One, when thinking about FUM, we're thinking about ability to manage that and scalability. And as we grow our FUM and reduce product, we've got to make sure that the investments we're making can support that. So we look at it both ways. We look at the fund flows that we can achieve. And what's interesting in going through the exercise this year through the strategy in COVID is that, as I look at the flows, there's no one region that I would say, part from asset class, that we're expecting a great deal. It all adds up. When you add 3, 4 products in the U.S.; 3 or 4 products in the U.K., Europe; 3 or 4 products in Australia, when you add them all up and hitting those targets, then the numbers start to come through. And that's when you get a realization of the benefits of a broad-based global distribution network. And I'll give an example of that. Now here, we have the Regnan impact strategy. We brought 4 people onboard. We've now launched the product in the U.K. We're launching a product in Dublin in the next few months, and we're launching the same product in Australia in November, 1 strategy, 4 people equally right across the world. And we could raise good amounts of FUM on simply that single investment. And so when you sit down and go through that, this is why we're adding to the distribution. The ability to leverage off that distribution of 1 product, 1 strategy right across the world, coordinated, it does make a difference. So organically, you think about it that way. We do overlay with markets and think about the equity risk premium over the long term, what will that be. And we do that to understand the ability to manage larger money, the ability to manage transactions, the ability to do client servicing, and that's why we look at it in totality rather than just organic alone. But we do look at it separately and totality. -------------------------------------------------------------------------------- James Cordukes, Crédit Suisse AG, Research Division - Research Analyst [98] -------------------------------------------------------------------------------- Yes. All right. And just another one. More broadly, it feels like there's a lot of cash sitting on the sidelines. I know that's something you talked about several years ago as being a big opportunity, and I think Hambro benefited from that. Are you looking at the next few years and thinking a lot of that cash will be deployed? And is that giving you the confidence in the flow outlook as well? -------------------------------------------------------------------------------- Cameron Williamson, Pendal Group Limited - Group CFO [99] -------------------------------------------------------------------------------- Yes, James. It is a seasonal view on the cash. We've -- I've tried to highlight in the presentation that some of it's already been earmarked for the 3 vehicles that we just talked to. It's probably... -------------------------------------------------------------------------------- James Cordukes, Crédit Suisse AG, Research Division - Research Analyst [100] -------------------------------------------------------------------------------- Sorry, just to clarify, I mean, I'm talking about cash in the overall 30 -- the overall asset management industry, cash that clients could deploy into your funds rather than Pendal's group cash. -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [101] -------------------------------------------------------------------------------- Right, right, right. So what was the question again, in terms of overall cash [flow]? -------------------------------------------------------------------------------- James Cordukes, Crédit Suisse AG, Research Division - Research Analyst [102] -------------------------------------------------------------------------------- It just -- it feels like there's a lot of cash sitting on the sidelines that could be deployed into new products, whether it's equities or multi-asset over the next few years. I know that was a theme that you talked about several years ago and Hambro benefited. I mean is that -- because of that cash is sitting there and could be deployed, is that giving you the confidence in the outlook for flows over the next 5 years? -------------------------------------------------------------------------------- Emilio Gonzalez, Pendal Group Limited - Group MD, CEO & Director [103] -------------------------------------------------------------------------------- Yes. Look, it's a combination of some of the funds that are performing at the moment have really got strong performance, and we should be converting them and looking to convert them. We've got some very good ideas in product development over the next 12 to 24 months that we're confident on, and the new product we've launched is driving that. In terms of your question of cash, I think there is cash in the system. What I think is probably more relevant is that I'm seeing -- or we're seeing more and more clients thinking about how to position their portfolios in a 0 interest rate world. And what we've seen here and offshore as well is a greater focus on clients, particularly institutional, not so much high net worth, on reshaping, remodeling, reducing the investment managers, trying to get scale. And in some cases, we've lost probably 3 accounts in the last 12 months due to clients reshaping their portfolios but not through performance. And what I have seen them doing is they're reducing complexity and reducing it to the big [calls] and not having the margin of course. So a couple of the emerging market mandates have been reduced. We've picked up through the wholesale. And even in this market, we've seen the small cash become sort of less important in people's portfolios. So the cash is there, but my sense is that clients are also putting a lot of thought in terms of their portfolio construction. Then you're starting to hear about the old 70-30 standard balanced portfolio is dead and with interest rates where they are. So I think that theme will probably be more relevant in terms of flows going forward. And if you're on the right end of that -- and we have been, in some cases, where there's been portfolio [revision] actually 1 month. In 1 of those -- actually, 2 of those mandates, 1 here and 1 offshore was existing clients combined, in Aussie dollar terms, those 2 mandates were around about $1.5 billion. And that's because, again, clients who revisited their portfolios may change, reduce managers. But we were kept, and we've got further flows out of that. So there's winners and losers. That's having a bigger impact on the flows in the institutional space rather than just cash as a standalone. -------------------------------------------------------------------------------- Operator [104] -------------------------------------------------------------------------------- Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.