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Edited Transcript of PDL.AX earnings conference call or presentation 11-May-20 12:00am GMT

Half Year 2020 Pendal Group Ltd Earnings Presentation

Sydney,New South Wales Jun 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Pendal Group Ltd earnings conference call or presentation Monday, May 11, 2020 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Cameron Williamson

Pendal Group Limited - Group CFO

* Emilio Gonzalez

Pendal Group Limited - Group CEO, MD & Director

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Conference Call Participants

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* Andrei Stadnik

Morgan Stanley, Research Division - VP

* 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

* Kieren Chidgey

UBS Investment Bank, Research Division - Executive Director & Research Analyst

* Matthew Dunger

BofA Merrill Lynch, Research Division - Research Analyst

* Simon Fitzgerald

Evans & Partners Pty. Ltd., Research Division - Executive Director of Diversified Financials

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Pendal Group Limited HY '20 Financial Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Emilio Gonzalez, Group Chief Executive Officer. Please go ahead.

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Emilio Gonzalez, Pendal Group Limited - Group CEO, MD & Director [2]

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Thank you very much, and good morning, everyone, and welcome to the Pendal Group half year results for the 2020 financial year and the analyst presentation. As introduced, I'm Emilio Gonzalez, Pendal Group Chief Executive Officer, and also joining me later on will be Cameron Williamson, Group CFO, focusing on the financial results.

I trust everyone is in good health and reasonable spirits seeing a lot of unique circumstances that we currently face. And it's been quite remarkable the way businesses have adapted in light of the COVID-19. I'll also touch on that about our own experiences through that process.

The agenda, which would be familiar to most of you who have been following us, you will see on Slide 2 includes the first half '20 overview, followed by an update on the business, funds and management flows as well as investment performance. And then I'll hand over to Cameron to go over the financials in more detail. And I'll close off on the strategy before opening up for questions and answers.

So moving on to results themselves. In terms of our highlights, I'm on Slide 4, the key highlights include, as you would have seen, our cash net profit after tax up by 2% on the back of higher average funds under management. Base management fees were marginally higher, and favorable currency movements during the period offset some of the declining FUM brought on by markets, which fell significantly in March after peaking around about mid-February. We have seen an improvement in short-term investment performance, particularly in strategies with defensive qualities. And we also announced the appointment of a Global Equity Impact team, which forms part of our strategy in growing out our responsible investment capability and products as well. Also in December, as a reminder, Nick Good started to head our U.S. business, and he started in December last year and filled out the global executive management team.

In terms of the numbers themselves, in terms of the results, average fund, as I said, was up 2% compared to the previous corresponding period. Fee revenue was flat. It comprised of a slight increase in base management fees, offset by a decline in performance fees. Operating expenses were up 2%, and we have been focused on managing our expense line, but in doing so without compromising our growth initiatives as well. And the result has been an increase of 2% on the previous corresponding period on our cash net profit after tax of $86.6 million. You'll see that statutory net profit after tax is down 21%, and this mainly reflects the decline in the value of the seed portfolio as a result of having to mark the seed portfolio mark-to-market, which goes through the statutory P&L. If you were to adjust for the mark-to-market impact of the seed portfolio, then it would be in line with cash net profit after tax outcome. Overall, the cash EPS was up 1% to $0.268 per share.

In terms of the dividend and given the path I've brought this forward in terms of our slides, the Board has declared a dividend of $0.15 per share. And we do recognize the importance of dividends to shareholders, and our consideration of the interim dividend took that into account. Now the declared dividend is lower than would be the case in more normal circumstances due to the uncertainty of the future as a result of COVID-19. As you would expect, we have stress-tested the business against a range of financial scenarios. And whilst the Board is confident in our ability to weather the impacts of the pandemic, it's also prudent and sensible for this half to have a reduced interim dividend. And it represents 56% payout ratio for the first 6 months of the year.

The big event in the first half, as we all know, has been COVID-19 and its ramifications globally, which you all would be well versed in. Businesses, as I said earlier, have responded remarkably well, notwithstanding that some companies in the hardest-hit sectors, the outcome could be quite devastating. Our focus, like many others, has been on the health and the welfare of our staff and the continuity of the business. And the transition to work-from-home has gone very, very smoothly with no disruption at all to the ongoing management of our client funds and our ability to manage portfolios in a very fast and volatile environment.

Business continuity plans were activated with the global Chief Risk Officer leading that response. And whilst BCPs were in place, we also enhanced our remote working capabilities, and management and the Board met regularly with ongoing assessment of activity and responses, including stress-testing a range of business and financial scenarios. All of this pointed to ongoing reassurance about the strength of our business model and the strength of our financial position. It also means that discretionary spending has been curtailed, recognizing that we also benefit in a business model with variable expenses that are linked to revenue. Importantly, we remain committed to investments in strategic initiatives for growth, and I'll touch more on that later in my strategy section.

I would add that I'm very proud of the way the team and staff has responded, particularly the way we've supported our clients through this period, with significantly higher levels of engagement with clients through webcasts, publications, newsletters, regular market updates and ongoing engagement with our clients. The amount of information and granularity ratchets up these type of events, and the team has responded very well. It demonstrates the agility and the nimbleness that's required at these important times. And when you combine that with our operational and financial strength, it has highlighted an important point of differentiation in what we have to offer to clients. Our boutique structure, our nimbleness and our agility, supported by financial strength has certainly shown how that is an important point of differentiation, particularly in the current times. Which brings me to reemphasizing the number of strengths that the business has. And it's worth reemphasizing in these quite unique times as they do take a greater level of importance.

When you look at our business strength, the first is our business model and our robustness. Our business model has been through many cycles before and has always come out strong. And as I said earlier, investment-led boutique culture, which combines that equity ownership, investment independence supported with a strong global operating platform, provides a pillar of strength to ride through these market cycles. Our interests are aligned across performance and costs, and our pursuit of our high asset strategies and managing our capacity is reflecting the margins of the business. And that itself provides some form of defense on the industry pressures on revenue margins. Our annuity-style cash flows and the ability to earn performance fees as well, on a relative basis, also provides for a sound and stable revenue base with upside potential in market downturns.

Secondly, on our financial position, the company is very strong. We have no debt, and we are making significant investments from our balance sheet in seed investments, which demonstrates further the strength of our finances. And as I said earlier, our variable costs are linked to revenue and changes in funds under management. Later on, I will talk more about our strategy, which demonstrates our ability to flex and enhance our product range to align with the way clients change their investment preferences as well and their demand. And it's that combination of the business offer -- we offer with financial strong footing that's been able to attract the right talent and allowed the business to continue to build new growth engines through market cycles.

Growth will also come from creating scale. And by investing in a more flexible operating platform and creating a senior management team with a global leadership experience that we've put together with the right focus will present opportunities for us across different regions. And all that combined positions the business with the capacity as well as the capability to build a platform of growth for this business.

The heart of our strategy is also being demonstrated through COVID-19. And many of you who have followed us for some time, we've always been steadfast in our strategy around growth and, importantly, diversification and the benefits that brings. And that's an important part of building a robust business model.

So Slide 10 shows you the combination of the different asset classes, strategies, breakdown across geographical spread of clients and multiple channels and a different exposure to multiple currencies that over time does move returns despite being leveraged to the financial markets. Now we know and don't expect that all our strategy will be doing work at one point in time, and not all regions and even the channels will sell into different markets at the same time. But the combination of the different factors means that the risk is diversified. It serves us well over time, and is currently serving us well in the current crisis where in March, for example, markets were down between 21% and 25%, but our fund was only down 15%. And that is a result of the spread of strategies and the currency exposure shielding the business from the full impact that we're seeing in the market declines.

In terms of asset classes and strategies, global equities is our largest single exposure, but we also have around 23% in cash and fixed income strategies, which in more difficult times, as we've seen, has also served us well. And the geographical spread has also been a benefit where we've also seen equities being shunned, particularly in our European strategies, but we've been able to continue to be successful on the growth in the U.S. from equity strategies as well.

As I turn my attention to FUM as well as flows. Closing FUM, as you see, has been impacted mostly as a result of the declines we saw in March in markets. And overall, FUM was down $14.4 billion with market movements contributing $12.9 billion of that movement. There was a positive FX contribution as the A dollar was lower against most major currencies, and it contributed $3.7 billion for the half.

Looking at the flows, you'll see that pre the Westpac channel, net flows were negative $3.2 billion, predominantly from the European strategies but partly offset by positive flows into our range of U.K. strategies. The flows into the U.K. strategies did improve post the U.K. election in December, as many of you would recall, and when the U.K. agreed the terms of its EU departure in that same month. And despite COVID, the U.K. strategy remained in positive flows with continued support for our U.K. dynamic and U.K. equity income products where both strategies have now posted 5 consecutive months of positive flows -- net positive flows.

Furthermore, Global Income Builder, Global Opportunities also posted net positive flows in the first half. And as I said earlier, European equity, as I mentioned, remains the most challenged. But like most of our strategies during the COVID period, we didn't see any material negative impact as markets changed in March. The only notable exception I would say was the flow environment in the U.S. where there was an uptick in outflows from the international select strategy as markets were declining and peaked out in February and declining in March.

You'll note that in OEIC, there was [$2-point] billion in outflows. And it does reflect a shift in funds internally where a major client moved its investment in the OEIC fund to a segregated mandate in February. And so the underlying OEIC outflows adjusting for that transition was more like negative $1.4 billion. And also, you'll see there a corresponding increase in the Hambro flows in the segregated accounts, which reflects that transition of a client money internally. The other significant movement was the $2 billion in outflows from the Westpac book primarily due to the ongoing consolidation of the superannuation platform and a change in the manager lineup across the multi-manager products. And that was primarily in Aussie equities and cash.

Just moving to performance. COVID-19 in the main resulted in a number of our key strategies performing quite well on a relative basis and with our shorter-term performance against benchmark also improving. We've had strong outperformance from, globally, our international strategies, Australian equities, cash and fixed income and listed property, collectively. Now 70% of our FUM over 1 year is ahead of benchmark and 71% of FUM ahead of benchmark over 3 years and 65% over 5 years. The one key strategy within the group that has faced significant headwinds after improvement in the sort of first quarter, in the December quarter, has been the U.K. equity income strategy. And I think that's understandable given the objective of that strategy is to generate attractive income from stocks, which, in the current environment, as you will all appreciate, is difficult in light of uncertainty of company dividends. Clients, however, understand the dynamics at play and have continued to support that strategy.

But in terms of our global equities, Aussie equities, fixed income franchise, the performance numbers are quite strong and performed well through the COVID crisis and the volatile market. And you can see that coming through. We've isolated some of the strategies that are now performing quite well, at least in the short term, on Slide 13, where those -- we've listed those equity strategies with alpha greater than 3% and fixed income strategies alpha greater than 1.5%. And in most cases, that level of outperformance in those categories generally leads to increased client interest going forward.

Although the big stars have been the Asia ex Japan Small & Mid Cap Fund and Emerging Small Cap Fund, the strategy with significant funds under management also featured prominently around -- as I said, around global, Aussie equities and fixed income. In the quartile rankings, improved performance is also reflected in improved 1-year quartile rankings where the percentage of funds in the first and second quartile now is slightly above 50%. But predominantly, in that 50%, our strategy with most of our FUM fixed. So from a FUM-weighted perspective, it's probably higher than that.

So with that introduction, overview of fund flow, I'll hand over to Cameron to go over the financials, and I'll come back and talk on the strategy. Cameron?

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Cameron Williamson, Pendal Group Limited - Group CFO [3]

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Thank you, Emilio, and good morning, everyone. Just to take you through the financial results. At the headline level, cash impact of $86.6 million for the half, that's up 2%; and cash EPS of $0.268 per share, that's up 1%, so both higher than the same period last year. And the result has been achieved with supportive markets, higher equity markets on average and the lower Australian dollar. The average level of the MSCI All Countries World Index in local currency terms, up 10% versus the same period last year. And we also had stronger markets in Australia, which were up more than 11%; and the U.S., more than 13%, which contributed to the supportive levels. The Australian dollar also declined against most major currencies, including the British pound, which was down 5%; and the U.S. dollar, down 6%, on average. Key there is the average levels, which drive the revenue.

Average fund under management, also up 2% to $98.9 billion, the markets and the currency offsetting the outflows, which we have seen over the last 12 months. Our base management fees increased also slightly to 1%. Now fee margins for the half were flat at 49 basis points. That's a pleasing outcome given industry pressure on fees, as we know.

Turning to the costs. First half operating costs of $143.1 million, that's up 2%. We did have lower variable staff costs in light of lower performance fees for the half, the Hambro performance fees on calendar 2019 and also a reduction in variable remuneration given the full year profit outlook.

In terms of our fixed costs, they were higher, up 14%. That has been impacted by the currency with the lower Australian dollar; on a constant currency basis, fixed costs up 10%. And if you recall, we did have a number of one-off items or nonrecurring items last year which were flagged. And adjusting for these, the fixed costs up more like 6% on a like-for-like basis.

Looking at the outlook for the second half. We are starting the second half with a significantly lower FUM starting point, 13% lower than the first half average as a result of the declines that we saw in March. In terms of the fee margins, they have been impacted, I guess, as the equity markets have declined. Our cash and fixed income book as a percentage of our portfolio as at 31 March is at 23%. And that's up from 20% at 30 September 2019, 6 months ago, and 17% a year earlier. And our cash and fixed income book actually has lower margins than our equities.

In terms of our full year cost outlook, previous guidance on mid- to high single-digit growth, that's now looking more like a low to mid-single digits on a constant currency basis. I keep flagging the constant currency because we do have a significant component of our fixed costs in foreign currency. In terms of the second half, we are looking at lower non-staff costs with savings around travel spend, marketing and sales conferences in light of activity decline. But we're not pulling back in areas of strategic importance, particularly with regards to our operating platform and data and technology spend over the course of the next 6 months and into next year.

Just turning to Slide 16, on the revenue slide. You can see there that our revenue was flat to the half of $243 million for the half. We have had higher fee revenue coming from our core institutional and wholesale channels, which offset the lower Westpac revenue and the performance fees. I'd just flag that the performance fees are at a significant low this year in light of the Hambro performance fees for the 2019, which does provide some upside as we look into next year also.

Turning to the fee margins on Slide 17. You'll see there, as I've said, the fee margins held at 49 basis points for the half, excluding our cash and fixed income part of our portfolio that were up 1 basis point to 58 basis points. We did see an uptick in fee margins from the wholesale channel. They were up 2 basis points to 72, which is pleasing. In the U.S. pool channel, we did see some growth in our fee margins there as a result of product mix. That was up 1 basis point to 81 basis points. And then the OEIC channel as well as the wholesale trust channel, both those channels were holding their line in terms of our fee margins.

Where we have seen a bit more pressure is in the institutional fee margins. That has come down 2 basis points to 36. About half of that, I would say, is due to pricing pressure. The other half would be driven by asset mix. We are seeing new clients winning at slightly lower margins than our back book. And cash and fixed income is becoming a larger component of the portfolio, as I mentioned. And that does have significant institutional funds under management.

Our Westpac fees have continued to decline. It is -- I would just point out that with the Westpac portfolio, a significant part of that portfolio is now in cash. 45% of the Westpac other, that ex legacy book, is now in cash. And that has come -- increased quite significantly over the last 2 -- couple of years. But Westpac now representing 8% of our total fee revenue is becoming less significant every year.

Just turning to our operating expenses for the half. You will see that our operating expenses are up 2% to $143 million -- $143.1 million versus $140 million of last year. We have had higher non-staff costs over the first half. Lower staff costs were driven by lower variable as a result of the performance fee and the outlook for the full year. Fixed staff costs are slightly higher. Some of that is currency-driven, but we have increased head count over the last 12 months. On average, our FTE is up approximately 17 head count. If you remember, we brought on the Regnan team about 12 months ago. So Regnan staff accounts for approximately about half that, 3 new global executives also for the year in terms of the 2 CEOs for the Hambro business and the Chief Risk Officer. With the balance in head count largely attributable to project staff focused on strategic initiatives, such as our back-office replatforming.

On the non-staff level, we have -- they have had increases but have been also impacted from the lower Australian dollar and the nonrecurring items from last year. On the fixed costs, up $6 million, $2.5 million of that can be attributable to nonrecurring items from last year, $1.6 million of that is currency-driven, and approximately $2 million of that is what I would call real increase in spend as a result of higher IP and data spend. Some of our brand costs and insurance costs also slightly higher than last year. On the variable costs, up $4.1 million, $2.6 million of that attributable to nonrecurring benefits that we got last year that we haven't seen this year with the balance largely attributable to higher fund-driven -- fund-related costs making up the difference.

Looking at our balance sheet on Slide 19. The balance sheet does remain very strong; ungeared, as Emilio has said. We have a seed portfolio of a touch under $200 million. It is down from 12 months ago following the closure of a couple of fund vehicles in the first half, and I'll touch on that in the next slide. Our net cash position of $123.9 million, it is slightly higher than last -- 12 months ago following those seed redemptions. But when aggregating the cash and the seed, it's $324 million, 12 months ago at $315 million, so continuing to build from where we were 12 months ago.

Just a reminder that the cash on the balance sheet is not all free cash. It is used to pay the first half dividend, which has been declared, also provide for variable remuneration, which is paid at the end of the year and also meet various regulatory and working capital requirements across the group with the remaining balance substantially available for future strategic initiatives such as seeding. We do have no debt, and that does provide us with flexibility for growth and take advantage of opportunities. Our net assets have continued to grow. And as you can see, our net tangible assets per share, a similar level to 12 months ago but well up on 3 or 4 years ago, the tangible strength of the business coming through and significantly improved over time.

So just touching on the seed portfolio on Slide 20. Our seed investment provide a platform for our future growth. It forms part of our strategic capital. And the reason we have removed the realized gains from our underlying earnings, our cash impact definition or classification, is because we use this capital to fund our future growth, and it's not distributable at this time. But as you can see, it has grown from 3 or 4 years ago. But if I break it down over the last 2 years, it has increased $22 million over this time. It has been quite active in terms of how we've allocated it and redeployed some of that capital. It has been impacted from recent market falls. If we had to sort of draw the line through February, it's probably about 10% decline in the portfolio over the COVID period through to 31 March. But it has been supported by currency as most of the seed is held in U.S. dollars and British pounds. Between March 2018, 2019, the seed portfolio grew $61 million. About 2/3 of that came via adding to the seed portfolio off the balance sheet as we seeded the Global Income Builder OEIC; Concentrated Global Share Fund, which is our Australian offering that we launched into the U.K. and European markets; and the Multi-Asset Target Return Fund here in Australia.

And in the last year, we have since closed the US SMID and Global Smaller Companies Funds. We couldn't get traction on those, and we flagged that in September, that that was happening. And we have redeemed our Multi-Asset Target Return Fund seed, which is now at sufficient scale, and redeployed some of those proceeds into a number of existing seeded vehicles where we want to bring them up to a level that hopefully can accelerate some flows. And this includes the Global Income Builder OEIC; and the Global Income Builder mutual fund and the Global Opportunities U.K. OEIC, which we launched last year as our first nonperformance fee offering in the U.K. The Global Income Builder OEIC, I'm pleased to say, has been winning client support since we've deployed that seed into that vehicle. And despite the market falls that we saw in late Feb and March, our seed portfolio still had positive investment performance of $4.1 million over the last 12 months.

Looking into the second half of this year, we have -- we are looking to seed the new global impact vehicles with the team starting at the beginning of the second half. And we see a seed portfolio somewhere around $250 million at a reasonable level for the group in order to drive our growth organically.

And with that, I'll hand it back to Emilio who can take you through the strategy and outlook section of the presentation.

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Emilio Gonzalez, Pendal Group Limited - Group CEO, MD & Director [4]

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Okay. Thanks, Cameron. So turning to the strategy, more specifically how we're thinking about positioning the business for growth. At the full year result, if you recall, I spoke about our new brand campaign, which, by the way, is working very well. And the tagline we were using was, "The future is worth investing in." No one, of course, would have predicted what the future was about to hit us and we were about to face and a future that would be very different in a changed world. Yet despite the disruption and the uncertainty, we do remain steadfast in our strategy as the future, we believe, is worth investing in. We are well positioned in a market that will provide opportunities for fund management groups such as ourselves with a proven business model, our strong financial position and a diversified range of products we offer our clients through our globally distributed platform.

A fund management business such as ours with these qualities and talent, the time is now and the opportunity to demonstrate our value through active management when our clients need it most, and we're demonstrating that through the March quarter. And we will be in a strong position to make the most of those opportunities in a crisis such as COVID can throw up. And to use a very well-used line in these moments, is, "Never waste a crisis."

We have responded swiftly, and we are delivering in difficult circumstances. And our fund managers are generating attractive relative outperformance in tough markets. It's the strength of our business model, as I said earlier, and our financial position that will allow us to remain focused and consistent on the key elements of the strategy that defines us, which is around attracting and retaining our investment talent and creating a portfolio of complementary strategies; maintaining a disciplined approach in capacity management to preserve investment performance; the development of extension strategies and new products, particularly as client needs evolve; and using that in leveraging off our global distribution network and driving client relationships; as we said, also improve our effectiveness and efficiency through investment in technology that will drive a better experience for the client. And important part of our strategy is also developing a world-class ESG responsible investment capability. That requires continued investment and focus around products, distribution and technology to position the business for long-term growth and better serve our clients.

COVID and the market declines means we have to also be very judicious and prudent on our cost programs and our expenditures, but equally important to remain committed to initiatives that underpin the growth of the business going forward. A great example of how all that comes together and on executing our strategy, which we're very focused on, is demonstrated in our most recent initiative, to aggressively develop and grow our ESG and responsible investment product range and position ourselves in what is a fast-growing segment of the market through expansion of Regnan's capabilities into investment management. It brings together the elements of strategy around talent, around complementarity, the development of new products, particularly where client needs are evolving and then leveraging our global distribution that provides scale with a product that can be sold globally and right across the different regions in which we're operating.

So I turn to Slide 23. In terms of implementing that strategy, Regnan is a leading provider of ESG research, advisory and engagement services and has provided these services for both Australian and international clients on ESG for well over 20 years and is highly regarded in that field. Pendal has supported Regnan throughout its history. And if you recall, in February last year, we became a wholly owned subsidiary of the Pendal Group. A key success factor that's becoming clear in responsible investment products is the ability to demonstrate expertise, knowledge and also have a credible investment team supporting that. Expertise and knowledge we have through Regnan and the investment management we've recruited with the appointment announced last December of a Global Equity Impact team based in London who previously worked at Hermes Investment Management, our specialist ESG firm. So that sets a platform, a strong platform to develop the Regnan brand into a global stewardship and investment management business. It's also a great opportunity that will also be able to leverage off the Pendal and Hambro global distribution network and its support.

The vision, as I state on Slide 23, is to become one of the world's foremost responsible investment managers. And I believe that over time, we can achieve that because of the expertise that we have in-house and the quality of the people we've been able to attract behind the brand that has been one of the pioneers in ESG. And having also that expertise and capability in-house will assist our existing investment management teams through collaboration on product development and insights. And so we have launched, as part of that program -- in February this year, we launched the Regnan Credit Impact Strategy in Australia, which is an actively managed portfolio of highly rated impact and sustainably green screened bonds targeting market returns and measurable impact. And that's been a collaboration used in Regnan ESG expertise and the Pendal strategic income team. And that product will be distributed through private wealth family offices and for purpose organizations.

We're also currently working on the development of the Regnan global equities impact strategy with a scheduled launch in the fourth quarter of this calendar year. Having brought the team -- the impact team on board with the expertise and now the product, the third key aspect around that is distribution and our global distribution network, which means quick access to a diverse client base.

And so on Slide 25, alongside our other products across the region, the new impact strategy is to quickly be positioned and reach to a whole range of clients across the U.S., Australia, Asia, U.K. and Europe. And as I said earlier, this is a segment of the market that is fast growing. If there's one product that salespeople are crying for, it's a responsible investment offering with differentiated features. And so the distribution teams are quite excited about the strategy and looking forward to engaging with clients. As a global initiative, we'll also benefit from the recent global management structure we've put in place to ensure we've got the right focus and the right strategy within those regions.

And on Slide 26, as I said at the full year results, I was excited to share with you all the new expanded global leadership team. And this has brought deep experience in investment management and greater focus across different regions with Richard Brandweiner heading the Australian business; Alexandra Altinger the U.K., Europe and Asia business; and Nick Good, who started with us in December, leading the U.S. business.

COVID-19 was a perfect example of how the team has come together. Albeit it's been a baptism of fire for our new sort of senior management team, but it's also demonstrated the enormous benefit of having the right leadership on the ground, being able to respond quickly and effectively and manage the business. It's been an important part of our strategy in terms of positioning the business for future growth.

In particular, the U.S. market continues to represent a key growth opportunity for the group. It currently represents 25% of the group FUM and growing. And so it is a significant part of our business. In the U.S., we've got a diversified client base, a strong reputation, and we do have good relationship with key gatekeepers and consultants. So it does present significant future potential given our low overall percentage penetration is quite low in the context of operating the largest market in the world.

The product offering in the U.S. is strong. And whilst the flagship international select fund is now closed, it has a lower customer base, and the U.S. business has been building up a wider product range, which is positioned to grow, particularly recent improved performance in a number of those products marketed in the U.S. There's also a medium- and long-term potential for product expansion within our current categories and further opportunities in distribution through making greater use of data, digital marketing and scalable sales solutions. All of that is currently being looked at in terms of how we improve our sales force capability on distribution.

Within U.K. and Europe, there also exists potential to expand into Europe. There are many markets we can expand further into and target new product areas that are more tailored to the European clientele. And the launch of the Regnan product, the ESG impact product, is important in Europe as ESG plays a very prominent part. And the global equities impact product strengthens our value proposition for our clients, and it also has the potential to open up new client relationships.

With Brexit, the uncertainty does remain, and the possibility of the U.K. exiting without a trade agreement will -- we've always positioned the business for a post-Brexit on a hard Brexit. And so irrespective of the outcome, we are well positioned in terms of a post-Brexit world.

And in Australia, briefly, we are increasingly seen as a trusted adviser and partnering with clients to provide solutions. Pleasingly, what we have seen over the last 6 months is the ability to partner with clients, and we have so with 2 key clients, to provide solution for their customers that involve the collaboration of the investment management team to develop products. And that has resulted in an outcome where we've been able to gain greater platform access and build long-term relationships. We've also been successful in expanding our model portfolio representation on some of the key platforms and having early success in the realigned distribution strategy, which we put in place in the second half of last year. And that was a distribution strategy where the sales team would realign around client segment as opposed to channel, to bring greater focus and understanding of the client needs and we're starting to see some early positive signs as a result of that.

If we are to maximize those initiatives, though, on the front line, it also requires the flexibility and a platform that's scalable. So while most other asset managers are also putting increasing attention to how technology can deliver a more efficient service, how it can deliver a better experience for our clients as well as act as a business enabler. So for our business, there is a pressing need to invest in technology as we move -- to move away from the back office -- the traditional back-office services which Westpac had provided. And there are a number of those that we need to move off. And combine that with a number of new systems upgrade, provides a unique opportunity to leverage our global scale for a number of things: gain better pricing, reduced complexity, while also create efficiencies with automated data reporting and information. So it will help accelerate our business to become a much more digitized service with the added benefit of reducing also operational risk. It will be -- it is and will be a multiyear project, but one that we see as creating a more flexible and scalable platform.

So looking to the future, overall, as you would have seen, our first half result was a solid outcome on the back of higher average markets, albeit a significant decline in markets in the month of March. Cash impact, up 2%. Our margins have held steady. We've declared an interim dividend of $0.15, which rewards shareholders for the first 6 months of the year, but also prudent in light of the uncertainty going forward. It also means staying disciplined on costs. I would also add that on the regulatory front, we've had some positive news in that the U.K. regulator, the FCA, has advised that the investigation that they were conducting on JOHCM has now been closed with no further action to be taken.

In terms of the outlook, as Cameron stated earlier, our starting FUM is materially lower than the first half this year's average, and that will have an effect on our second half revenue. We remain committed, however, on the key initiatives that provide for growth, including investment in our operating platform and the development and the launch of the new Impact products. COVID-19 isn't going away very quickly. We expect to see the continued fall-out globally as the world looks to recover from what's been one of the most severe contractions in economic activity since the Second World War. I'm sure there will be periods of optimism, but also there'll be periods of setbacks, which means ongoing market volatility, but it does play into our core competency and does play into the hands of active managers. It also means that the industry may be under pressure and also may create opportunities, which will be an opportunity for us, given our strong financial position.

We are confident in our positioning from both a competitive and a balance sheet perspective. The balance sheet is strong, the business model proven. We have strong cash flows, which positions us in a very competitive position. We also have experienced global management team and a broad investment expertise that will allow us to navigate through the current crisis with the confidence to continue to invest in initiatives for growth and come through the crisis with momentum and in a much stronger position. I would also add that employees do have significant equity ownership and therefore align with shareholders in producing long-term outcomes.

So thank you for your time. I'll pause there, and I'll hand over to the operator to take questions over the line.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Simon Fitzgerald from EaP.

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Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Executive Director of Diversified Financials [2]

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I just got 3 brief questions here. In regards to AUM levels, I know that you stated that second half '20 starts materially below first half '20 averages. However, are you able to state what the AUM was at the close of, say, April?

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Emilio Gonzalez, Pendal Group Limited - Group CEO, MD & Director [3]

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Our FUM announcement is on a quarterly basis. And so we update our AUM on a quarterly basis. We haven't moved to a monthly basis. So I won't be stating monthly numbers. We're sticking to our process of giving monthly updates on our AUM on a quarterly basis, and that will be probably in the first week or actually the second week in July.

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Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Executive Director of Diversified Financials [4]

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Okay. I appreciate that. In terms of the demand -- also, the second question relates to seed capital. In terms of demand on seed capital and say, the near term or at least second half '20, I think Cameron mentioned that an appropriate level to support the business would be around about $250 million. Can you sort of talk about whether there's any uses in the near term for seed capital, what potential you have there? But also I'm interested to know whether the Board's had any more updated thoughts about whether you should hedge the seed capital. And I understand, too, that the tracking error and the basis risk, it will never be perfect, but interested in your thoughts on that.

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Emilio Gonzalez, Pendal Group Limited - Group CEO, MD & Director [5]

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Okay. There's a few points there. As we market the seed capital, $250 million in to where it is. One of the things about seed capital is there's always demand for seed capital, and there's always opportunities. And the challenge of looking at seed capital is where to best allocate it. And seed capital can be broken down into 2 key areas. One is allocating seed for new strategies and then allocating seed to get it to scale. The other one is allocating seed in areas that we can recycle it very quickly. So the best success of seed capital is allocating it, getting client demand, and that frees up seed capital for recycling. So as I look forward, the demand for seed capital will definitely come from the new products we're launching, particularly on Global Equities Impact. And the other demand will come from a number of strategies that have come strong out of the March quarter, whether we recycle some of that and put some fresh capital to scale them up. So there's 1 or 2 strategies in the U.S., for example, that's moved from a 3-star to a 5-star. Scale is quite low, so we may take advantage of increasing that.

In terms of your hedging, we have a policy not to hedge our seed capital. We run a business that's already leveraged the markets. We're very comfortable with that. People understand the nature of our business through cycles. And maybe if we were borrowing to invest in seed capital, the argument for hedging would be quite stronger because you've got a liability. But we're very comfortable with the seed capital on our balance sheet without -- no liability attached, and we take a long-term view. And investing in new markets also aligns us with our clients. It's a very strong story to say that we're backing our investments, putting our own money in there, alongside our clients, irrespective of whether the markets go up or down.

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Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Executive Director of Diversified Financials [6]

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Yes. Okay. That's very clear. And just a final question, just on the institutional business ex Westpac. Can you talk about whether there's some clients looking to put more into equities, just given market falls? I'd be interested to know if you've got a pipeline there.

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Emilio Gonzalez, Pendal Group Limited - Group CEO, MD & Director [7]

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Well, we're seeing rebalancing at the end of March. And so that's been more strategic between equities and fixed income. Obviously, equity is down; fixed income, not as much. And we will sort of had some outflows as a result of some of that rebalancing coming through. Having said that, I mean, March was a period where everyone was focused on the portfolio. April was a period of managing clients. But I expect discussions have now probably pick up in terms of positioning portfolios going forward. There's a few things in the pipeline that we're starting to have discussion with existing clients and potential clients, but that's sort of what we're seeing. That's what we expect in terms of equities. As I said, there's a [couple that doesn't go at the moment]. At the same time, we are at risk of [risk weighting] and potentially funds raising cash as well.

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Operator [8]

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Your next question comes from Ed Henning from CLSA.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [9]

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A couple for me. Cameron, you just touched on the marginally down in the second half, and that's mainly on mix on equity versus cash and fixed interest. Firstly, can you give us any guidance on that? And then secondly, once that kind of rebases, kind of looking at it going forward, the mix of growth in equities and cash and fixed interest and also from channel, do you still expect margins to fall slightly going forward, just as the first one?

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Cameron Williamson, Pendal Group Limited - Group CFO [10]

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Yes. I mean I think I was just pointing out, Ed, that the mix factor and having a higher weighting to our cash and fixed income book at the end of March would naturally lead to a slight decrease in our base fee margins. Now direction of travel is going to be dependent on how long that lasts. Obviously, markets have had a bounce since then. Obviously, I think we've had that 10% markets in April. So that component of our cash and fixed income book probably isn't as great as it was at 31 March. But I would say that what we have seen with our fee margins is, particularly in that institutional channel, we have seen some pressure on our fees that have come down, particularly with new wins being at slightly lower fee levels than some of our back book, and that will play out over time.

Direction of travel is slow. I wouldn't say it's immediate, but there is definitely downward fee pressures across the board on -- within our channels. What we try and do, and we try and manage the remaining capacity that we have in our strategies to best allocate that to where we can maximize our fee revenue, and that has supported our fee margins over time. You'll have seen on the slide that I talked to is as our fee margins have been relatively stable for 4 or 5 years on the equity side or on noncash and fixed income side despite the fee pressures in the industry. So -- and that -- a lot of that is capacity management. So I was pointing out the obvious. Our cash and fixed income book is bigger as at 31 March, and so you should sort of factor that in. But if the markets continue to bounce, that won't be the case as much.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [11]

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Yes. Just the next one, just on the Westpac and potential headwinds going forward there. I think -- I don't know if it was Emilio -- you sort of touched on that 45% is now in cash. Do you see less headwinds from that? Or given market moves, it might accelerate it a little bit, and then hopefully, it'll start to dwindle a little bit, the headwind going forward from the Westpac money rolling off?

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Emilio Gonzalez, Pendal Group Limited - Group CEO, MD & Director [12]

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Yes. It's made up of -- well sorry, Murray, you got -- sorry, the actual cash book is made up from a number of areas within Westpac. And I think those areas being -- Westpac, the life company, we managed a significant mandate for them in terms of their capital. They're multi-manager where we've got quite a big cash weighting. It does -- we did see it move around towards the end of March as they reweighted the portfolios in light of the equity falls that happened. But what we have seen is where they have taken assets away. And in some of the more legacy-type products and platforms that they've been trying to consolidate, our positioning within that is probably more at the multi-asset level as opposed to the cash. So we probably always run the cash. It's just that the assets that we're losing tend to be other asset classes as opposed to cash, and so the cash weighting has naturally gone up as a result of the redemption. So I would say it's probably more stickier than probably some of the other asset classes at this point.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [13]

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Okay. That's helpful. And just one last one from me. Just on your growth in ESG, obviously, you're funding some new strategies. Can you just touch on how quickly you think you can get some traction in these with no track record to start to see decent inflows coming in and the potential capacity of the strategies, please?

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Emilio Gonzalez, Pendal Group Limited - Group CEO, MD & Director [14]

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Yes. Look, it's a good question. I think with most of our strategies when we launch them, and we give -- we say, in the first 3 years and building up a new track record, we don't put high expectations. We don't put high numbers, and it's a long-term game. This one is a little bit different for a number of reasons. One, clearly, the sector demand is high; two, what we've launched is a more specialist capability at that end of the market, which supports the Regnan brand in this position. And if you think about listed Global Equities Impact, there's not too many of those available globally, and there's not too many with a more a 3- to 5-year track record anyway, so it's reasonably new.

Having said that, we also know that there's significant interest and demand because it's being driven by the growth in the sector. And the -- one of the few teams that with some reasonable linking track record is the team we've brought on board. And so the track record will be new, but the team we brought on board has got a reasonable track record and probably the -- one of the longest one in the industry. And so -- and the level of interest we've received so far has been positive. So I would expect the take-up in this type of strategy, given its specialized nature in demand, to be quicker than what we've seen some of our other strategies and launching new capability.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [15]

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And just capacity?

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Emilio Gonzalez, Pendal Group Limited - Group CEO, MD & Director [16]

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Our capacity, look, it's a moving feet, at least we're talking about $5 billion.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [17]

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Is that both for credit and for the equities?

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Emilio Gonzalez, Pendal Group Limited - Group CEO, MD & Director [18]

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Our credit capacity is really driven by supply. It's a relative new market. And within credit capacity, it's always a lot bigger. The credit markets are much bigger than the equity markets. And so within the credit, we haven't got a capacity number on there because it's very much driven by supply, and that we think will grow over time. On the equities, it's about liquidity and ability to get set. Our initial capacity position is about $5 billion.

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Operator [19]

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Your next question comes from Andrei Stadnik from MS.

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Andrei Stadnik, Morgan Stanley, Research Division - VP [20]

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I had a couple of questions, please, and apologies if they were addressed earlier. I had a small conflict with another presentation. But in terms of what you've seen post March, the industry has seen much better retail and mutual fund demand in the Northern Hemisphere in April versus March. What have you seen for -- with your funds in terms of changes in April?

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Emilio Gonzalez, Pendal Group Limited - Group CEO, MD & Director [21]

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Yes. Look, it's been very interesting to look at the flows, and there's pre-COVID, COVID crisis, and sort of recovery phase that we're in now. And as I've said previously, the March flows were not much different than what we saw pre-COVID. Clients had been very stable. They haven't panicked. They're recognizing that they are still at the bottom. This could be transitionary. They want to be there for the recovery and has held their nerve. Globally, when you go look at the flows, most of the outflows have been predominantly been in bonds, and we've been tracking global flows every week. And what we've seen is European equities have been outflows, some in the U.S., particularly the mid-cap, but predominantly dominated by bonds, which hasn't impacted us, obviously, because we don't have a big global bond portfolio.

April is also reflective of the clients. One, I mean obviously, the markets recovered very, very quickly. And so responses, people have been caught out by how quickly it had been recovered. And because they haven't really sold out of March, they haven't really done a great deal in April either. There's only 2 areas -- well, probably 3 for us. The first one is reweighting of portfolios. That has been going on, and we've seen that across our sort of flows with a couple of institutional clients. And secondly is ensuring some of our clients that have liquidity and cash levels and ensuring that in this current climate globally, our liquidity is top of mind. And so that's an area of focus.

The only area that I can say was directly linked to COVID compared to our historical trend is that we did see an uptick in our flows in International Select, our global or international [strain] we sell in the U.S., pretty much in line with the movements there. But it's been reasonably sort of held up well, not major trends between March and April. And I think going forward, the focus is on the rate of recovery and people are -- some people are obviously bullish that it will recover real quickly. Others are a bit more conservative and a bit of a waiting game at the moment.

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Andrei Stadnik, Morgan Stanley, Research Division - VP [22]

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Cheers. And in terms of how we should be thinking -- and again, apologies if this was addressed. But in terms of costs, how should we be thinking about costs into the second half? And then more broadly, into next year, has the current bottom market volatility changed your approach and thinking around cost management?

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Cameron Williamson, Pendal Group Limited - Group CFO [23]

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So Andrei, the costs for the second half, we've guided to be lower. I mean there is a pullback in certain natural sort of cost lines like travel and marketing and sales conferences and things like that just through the inactivity that's sort of been brought on by COVID. But we are pulling back on some of our discretionary spend. Where we're not pulling back is in areas where we have a longer-term, strategic goal, and that does involve an investment, and that investment will continue at this point in time, such as the investment in the operating platform, as you know. And so that continues.

In terms of the guidance that we gave, in September, we said mid- to single -- mid- to high single digits in terms of our fixed costs for the year. It is currency affected. So on a constant currency basis, we've guided lower to be sort of low to mid-single digits over the back end, over the course of the full year. So we will expect slightly lower fixed costs for the second half of this year.

And looking into next year, however, and it is early days because it will be dependent on the speed of the recovery, I would think that we're back into that sort of mid- to high single digits again. We are looking at savings in certain areas to help fund these initiatives, and that continues. But we're not pulling back in terms of adding teams. We've obviously got the Impact team starting shortly as well as sort of the replatforming, as I said. So mid- to high single digits for next year, but again, that's on a constant currency basis from current levels as opposed to some items which will be currency affected.

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Operator [24]

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Our next question comes from Matt Dunger from BofA Securities.

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Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [25]

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I just had a question on the seed portfolio. Do you look at a right amount of net investment, like net of the redemptions annually over the medium term?

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Cameron Williamson, Pendal Group Limited - Group CFO [26]

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Sorry, Matt, just in terms of your questioning on this, are you talking about an amount that we look at contributing into the portfolio on an annual basis? Is that...

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Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [27]

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Yes. Is there a dollar amount of net contribution, net of the redemptions that you look at to sort of grow the seed portfolio over the medium to longer term?

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Cameron Williamson, Pendal Group Limited - Group CFO [28]

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Well, we've got a dividend payout ratio of 80% to 90% of that cash NPAT. So we do retain some capital in the business for strategic initiatives to grow the business, and a lot of that has found its way into the seed portfolio. So much of our sort of retained profits or cash profits have been sort of invested in the seed portfolio, particularly over the 3 or 4 years. What I was saying on the call was at an optimal level, we wouldn't want the seed portfolio to be too dominant in the overall balance sheet, but sort of at a level of mid-200s is sort of a level that we're comfortable with in order to grow the business and sort of redeploy some of that -- as some of those strategies get to scale, redeploy that capital into newer strategies. But yes, I mean it's funded through our retained profits. And there will be other areas that come up where we will look to redeploy some of that. But for the most part, in the last couple of years, it has found its way into the seed portfolio.

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Matthew Dunger, BofA Merrill Lynch, Research Division - Research Analyst [29]

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Great. And if I could just ask what the exposure is to the industry's super fund redemptions. We've heard of some quite large leap of funds between liquidity. What sort of exposure do you have? And where would this come through? Would this be coming through the Westpac multi-asset?

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Emilio Gonzalez, Pendal Group Limited - Group CEO, MD & Director [30]

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Yes. No. Probably most of that will be through our institutional accounts where we run a number of mandates for a number of different type of industry, super clients (inaudible) both cash, fixed income and equities. And despite what (inaudible) sort of we've been hearing about, we haven't seen any significant change in terms of clients looking to redeem for that specific purpose alone. There has been in -- particularly in late March, a client was it monthly -- or sorry, quarter end, which emphasizes it's important to our strategic. We did see movement of cash from our clients, and we do have a very big cash book for our clients. But we haven't seen any specific movement directly related to that or any significant movement to -- from our industry large superannuation clients who are related to any pressure on members taking advantage of the ability to withdraw cash or withdraw their investments.

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Operator [31]

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Our next question comes from Brendan Carrig from Macquarie.

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Brendan Carrig, Macquarie Research - Research Analyst [32]

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Just maybe following up from the Westpac stuff a little bit. Has the recent strategic announcement from Westpac sort of changed your thinking as to 2 factors, the first being the rate of outflows or the rebalancing that has been occurring and is likely to occur? And then the second, just around the replatforming. Has the potential for them to be running that as more of a standalone business had any impact on your thinking or the potential for them to be able to cross subsidize some of that investment that you talked about in the past?

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Emilio Gonzalez, Pendal Group Limited - Group CEO, MD & Director [33]

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Yes. No. Look, it's very early days, of course. On the flows, it is a separate team that run a strategy in a right-or-wrong term basis. So I don't imagine that strategy changing overnight even with the change in ownership, albeit with any change in ownership, there's always risk there of some form of change in direction and outlook. The good news is that we've been moving away from the exposure of that book for a long period of time. And the overall Westpac relationship is now less than -- I think it's about 8% of our revenue. And so through our strategy over the number of years and purchasing (inaudible) offshore, that will deliberately to decrease our exposure to our book that was quite significant but also likely to deteriorate over time. So we'd manage that, put in a position that if it does be to increase outflows, at least the rubber band has already been moved.

On the replatforming, I imagine any potential review there or any potential change in ownership would want to ensure that, that happens. And so we are -- have a program in place. It's been agreed. It's been signed off and with a time table. So I don't imagine that being changed or disrupted. And there's alignment in interest on both payers to get that done and get it done in the time table that we have agreed.

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Brendan Carrig, Macquarie Research - Research Analyst [34]

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Excellent. And then I mean you touched on the diversification away from it and the acquisition of Hambro which proceeded quite well. Has the [car market] -- it will change your thinking around potential M&A opportunities? Or is it all very much seed strategy is front of mind and the preferred approach, and you haven't really [thought of mind] to any other M&A or inorganic growth even notwithstanding there would be potentially some shape of potential acquisitions out there?

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Emilio Gonzalez, Pendal Group Limited - Group CEO, MD & Director [35]

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Yes. Look, I think my response to that question is the same as it always has been since we went offshore and purchased Hambro. We always have an open mind. We've always kept an open door. But M&A for us is not a strategy. It's executing on the strategy. So if you go back to the core principles of what guide us, it's the attraction retaining of talent and bringing on board complementary strategies. If that happens to be through opportunities that lend itself to M&A, then yes, we would look at it, just like we looked at Hambro at a time when things were quite difficult. And so there will be opportunities that I think these current prices will throw up. And like we've been doing for the last 7 or 8 years, always consider in light of the strategy and if fits, then yes, we will look at it. If it doesn't, then we continue on the organic path with that in place.

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Brendan Carrig, Macquarie Research - Research Analyst [36]

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And then -- that's great. And then one more, if I may. Just on the performance of the Australian business. Obviously, the April looked like it was another good month in terms of the performance fee update. Is there just any comment that you'd like to provide there, given that, historically, sort of our markets haven't necessarily been the best kind of an environment, but it seems like the April recovery month is able to sort of continue to deliver outperformance? Is there any comments you'd like to provide there?

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Emilio Gonzalez, Pendal Group Limited - Group CEO, MD & Director [37]

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Yes. Look, history will tell you in active management, the best opportunity to add value is when the dispersion of stocks and sectors and factors, and that's been happening; and also, the ability to have investment process that allow you to move quickly and quite agile in positioning that portfolio. So across our strategies where that is part of our philosophy, we're coming out of this quite strongly. And the Aussie equity team has proven once again their ability to [adjust] come through this in a strong fashion and performing quite strong. And so rising markets can be more difficult for active management, particularly if it's narrow. And they buy a few stocks, and we all know that. In these type of markets, unfortunately, absolute returns are down, but the ROCE terms are an opportunity for value -- sorry, for active management to demonstrate the ability to move, whereas a passive fund, you're just stuck in the position you're at. So the performance has been good. It happens every time there's a market correction. People are reminded that the value of active management to at least manage the downside and not lose as much as the market.

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Operator [38]

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Your next question comes from Kieren Chidgey from UBS.

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Kieren Chidgey, UBS Investment Bank, Research Division - Executive Director & Research Analyst [39]

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Apologies if you might have covered this already, but Cameron, I just wanted to circle back on some of your expense commentary from a little bit earlier. You sort of talked about sort of fixed cost growth guidance being edged down to low to mid-single-digit compared to -- I think at the start of the year was mid- to high digit, but that's on a constant currency basis. Can you just give us a sort of broad indication today, where you would see currency sort of contributing to that?

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Cameron Williamson, Pendal Group Limited - Group CFO [40]

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Yes. So I think I called it out Kieren, I'm not sure if you picked that up, but look, of the 14%, 14% fixed cost growth in the first half, on a constant currency basis, that would be more like 10%, right? So currency did have an effect on our costs. And obviously, if we factor into the second half as well given that the Aussie is significantly below where it was 6 months ago. So when we were giving guidance at the end of September, it was based on the currency levels at that time. And obviously, as things move, so does our cost base, given we have significant part of our cost base in pounds and U.S. dollars in particular.

So yes, the guidance that I sort of alluded to in the call earlier was really about the full year effect, not necessarily just the second half. It was the full year effect of low to mid. And so you will expect to see, obviously, costs come off a little bit on the discretionary spend, somewhere in the region, I think, is about $2 million to $3 million on a half-on-half basis. And so that will feed in. And that will -- that should lower the full year outlook down to those levels that I guided on.

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Kieren Chidgey, UBS Investment Bank, Research Division - Executive Director & Research Analyst [41]

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Okay. But just to be clear, so the low to mid is sort of pretty maybe an FX headwind of around 4%, I mean depending on what your current (inaudible)?

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Cameron Williamson, Pendal Group Limited - Group CFO [42]

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Yes, absolutely. Yes. So we're going to -- we're probably going to end up in line with guidance. But then when you break it apart, 2/3 of that cost growth is currency. 1/3 is real cost growth. So that's another way of looking at it.

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Kieren Chidgey, UBS Investment Bank, Research Division - Executive Director & Research Analyst [43]

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Okay. And I mean how should we be thinking about variable expenses for the remainder of the year and into '21? What is the group's approach to just sort of insulating operating margins as we go through a weaker revenue backdrop?

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Cameron Williamson, Pendal Group Limited - Group CFO [44]

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Yes. I mean our variable costs, I mean, as you know, are highly linked to revenue and profit and share price in some regards if you're asking as well. So in that regard, clearly, as things come off, there is a natural cushioning. Our overall operating margin for the half, I think, is 41%. I would say that's probably at the upper end, and you'd expect to see a little bit of contraction in that operating margin, and that will be a combination of a little bit on the fixed cost but also on the variable as it feeds into the second half. Things do improve. We do drip seed more back into the variable as the business profit improves. Some of that gets fed into staff pools, et cetera. So there will be a natural feed into that. But when I look at over the full year, I would expect to see a slightly lower operating margin from what we've seen in the first half.

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Kieren Chidgey, UBS Investment Bank, Research Division - Executive Director & Research Analyst [45]

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Okay. And Emilio, just on fee pressure, just wondering if you could talk to some of the trends you're seeing across the different regions. I'm not sure if you did during the main presentation. I might have missed it. Yes, including sort of the U.K. and U.S., which are obviously we're less close to.

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Emilio Gonzalez, Pendal Group Limited - Group CEO, MD & Director [46]

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Yes. Look, I think the best way I can put it is the same question I asked 3 years ago. Australia by far is the most cost-conscious on fees, and that's recognized globally. U.K., U.S., picking to your comment, attractive and remaining so with less fee pressure. The last 3 or 4 years has seen an increased focus in the U.K. and the U.S. U.K. has also been regulatory-driven. And as part of the FCA asset management study, all funds now or org funds have to report (inaudible). And so we've just done that, given our funds are December end, and we've reported for the March quarter, have insight and issue that. And that's a regulatory initiative to put the spotlight on fees, and it's quite known in the U.K. that the FCA wants the fees to come down.

So there's pressure there or albeit, I think, over time, that will be a slow-moving feast. The U.S., probably in the last 12 months, I would say, it has definitely been an increase in terms of discussions on fees for various reasons. In this current investment climate and market returns, I probably expect that to continue. There's no question that our front book and any discussions on new mandates is at lower margins than our back book. And some of that back book goes back 7, 8, 9 years. Where we had to continue strong performance, we can retain it and defend it. Where performance is poor, that discussion comes around quite quickly. So the U.S. has certainly, I think, in the last 2 to 3 years, has picked up its focus on fees in the U.K. It's been there but also regulatory driven. So overall, the margins globally will continue to be under pressure.

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Operator [47]

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Your final question comes from James Cordukes from Crédit Suisse.

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James Cordukes, Crédit Suisse AG, Research Division - Research Analyst [48]

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Just a question on the dividend. You said it was lower than it normally would be. Do you think there's scope for a makeup with the full year dividend back to the target payout ratio if the environment improves? Or was the dividend reduction partly about topping up feed capital for the opportunities in the U.S. and the Global Equity Impact fund?

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Emilio Gonzalez, Pendal Group Limited - Group CEO, MD & Director [49]

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Yes. No. I think in this current climate, and you think about first half, 6 months, COVID has really impacted in March, and as you look forward, as I said, the prudent and sensible thing to do is to reflect the more positive in the last 6 months but also recognize that the next 6 months is going to be tougher. The payout ratio of 80% to 90% is something we've had in place since 2007 and something that gets reviewed at every time at the interim and the full year. And also, traditionally, the first half payout ratio is on the lower end than the full year payout ratio. And in the second half, it tends to be on the higher end. That's no different this year, although the lower end is lower. It's 56%. We have been as low as 57% in the last 4 or 5 years. And so it reflects the uncertain environment going forward. And not too similar the way we looked at the dividend in the past but factoring in a more uncertain environment going forward. And so I would expect, unless conditions change, that the second half dividend will be at a higher payout ratio to reflect all of that, pretty much in the same vein that we've done in the past as well.

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James Cordukes, Crédit Suisse AG, Research Division - Research Analyst [50]

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And the final year -- sorry, the full year dividend would probably be in that 80% to 90% range, capturing both the interim and the final?

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Emilio Gonzalez, Pendal Group Limited - Group CEO, MD & Director [51]

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Yes. Well, the full year payout ratio is assessed at the time of the interim dividend and the full year results. And so historically, it's been at 80% to 90%. If there was a change, we'll obviously advise the market on that.

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James Cordukes, Crédit Suisse AG, Research Division - Research Analyst [52]

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And just a quick question on compensation. I mean you talked to when you accrued comp for this half, you consider where the full year was headed. Can you give us a bit more color about how that was set and in particular, whether that -- the guidance that you talked to around the comp ratio at the full year '19 results is still relevant?

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Cameron Williamson, Pendal Group Limited - Group CFO [53]

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Yes. Obviously, we've got a couple of programs, James, and one being for our investment teams, which they get a revenue share. So it's very, very much linked. So the corporate staff, it's a bit different because the corporate pools are finalized at the end of the year based on where your profit is up. And clearly, when we're drawing a line in the sand for the first half, markets were in free fall in March, and we had to make a call as to where we thought they would be. But those things do improve. Obviously, things get sort of reweighted as the year goes on. Our -- in terms of the comp ratios, there hasn't been a change in light of that, thinking about in terms of the full year effect is really just corporate staff as opposed to the investment teams.

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Operator [54]

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There are no further questions at this time. I'll now hand back to Mr. Gonzalez for closing remarks.

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Emilio Gonzalez, Pendal Group Limited - Group CEO, MD & Director [55]

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Thank you all. I'll be short. And so look, thank you, everyone, for being on the call and support over the last 6 months. It's been a very interesting 6 months that's thrown everything at us, but that's the nature of the market; as I said, it's not new for us. We've been here before. We've seen the cycles. We know the playbook, what's different and unique are the circumstances around it. So I look forward to talking with you all in the full year and the one-on-one meetings via streaming. And take care, and look after yourself, and thanks again.