Vertically integrated strategy is delivering
- Intrinsic restricted advisers are contributing 33% of net flows into our platform and 26% of Old Mutual Global Investors net flows through Old Mutual Cirilium Portfolios and Old Mutual Generation solutions
- Vertically integrated funds under management are £11.5 billion, up 6% on year end 2015
- Investment performance is a key part of delivering good customer outcomes and close monitoring of this continues with action taken as necessary. Old Mutual Global Investors showed 67% of single strategy funds above target over 3 years, compared to 67% at December 2015
Delivering good customer outcomes
- Capped Heritage pension exit fees at 1% for over 55’s and restructured Heritage fees to deliver better customer outcomes ahead of the expected regulatory deadline of March 2017
Old Mutual Wealth Italy
- Agreed sale with ERGO Italia, owned by Cinven, for €278 million cash, plus interest to completion
Paul Feeney, chief executive of Old Mutual Wealth, comments:
“This has been a challenging six months for Old Mutual Wealth, and the whole industry, with volatile markets dominating the first half of this year, indeed it was the worst period for net retail flows for the industry in 20 years. Against this backdrop, I am pleased with the resilient net client cash flow that the business delivered of £3.2 billion, up 39% on that of the prior year.
“We are focused on executing our strategy and delivering good outcomes for our customers. Continued investment to achieve our strategy and to build capability for the future as a standalone business has had an impact on our bottom line for the half year, but our underlying revenue growth remains robust.
“Our advice-led, vertically integrated strategy is delivering year on year growth in net flows, increasing our funds under management despite weaker markets. We are in a great position to build competitive advantage and deliver sustainable long-term growth in profits, cash generation and value.
“We expect markets will continue to be challenging as details of the UK’s exit from the EU are worked through and until investor confidence starts to return. However, I am confident that by remaining focused on meeting our customer needs, delivering our strategy and developing our structure and capabilities, we will continue to make good progress in the run up to the eventual separation from Old Mutual plc.”
Old Mutual Wealth achieved good client cash flow despite difficult markets creating one of the toughest periods for many years in the UK retail investment industry.
Uncertainty in the lead up to the UK’s Referendum on EU membership, and the subsequent market turbulence in response to the outcome, increased nervousness in markets. Investor confidence also remained low throughout the period.
Against this negative background, Old Mutual Wealth outperformed the industry trend with good underlying growth in flows into the UK Platform and into Old Mutual Global Investors’ fund solutions via Intrinsic advisers and the advice-led, vertically integrated strategy delivered real benefits. Old Mutual Wealth’s multi-channel model of using restricted, tied, open-market and a small direct distribution capability, helped expand market reach by providing a number of ways to get solutions to customers and making it easy for them to invest money with the company. In addition, the broad range of products and solutions which are relevant to customers’ needs through this cycle, in particular absolute return funds and the newly launched Old Mutual UK Specialist Equity fund and Old Mutual Gold & Silver fund, contributed significantly to flows.
ADJUSTED OPERATING PROFIT:
Old Mutual Wealth adjusted operating profit (“AOP”) of £104 million was 31% lower than prior year (H1 2015: £151 million).
Underlying performance in core “Invest & Grow” business has been satisfactory, delivering underlying organic growth in volatile market conditions. Adjusted operating profit from this segment of the business is £90 million, down 11%. There were lower performance fees within Old Mutual Global Investors. Benefit was gained from having Quilter Cheviot for the full six months and, as planned, an LTIP charge of £5 million was incurred in Intrinsic in respect of successful business delivery, in accordance with the acquisition agreement.
The “Manage for Value” adjusted operating profit of £14 million is 72% below prior year. One-off charges of £21 million were incurred to ensure better customer outcomes on the Heritage book of business, including capping exit fees to 1% for over 55’s and changing some of the fee structures. Adjusted operating profit in 2015 included £7 million from Switzerland which was sold at the end of Q3 last year. Weaker markets contributed to the decline in profitability given lower funds under management as the book of business continues to run off.
Underlying revenue growth has been predominantly driven by higher funds under management in the core businesses, despite lower average markets, and the inclusion of Quilter Cheviot for an additional two months in 2016.
The overall Wealth revenue margin of 64bps is slightly lower for the same period of the prior year (66bps). Modest margin pressure has been partially offset by increasing levels of vertical integration and improved Old Mutual Global Investors margins. The Platform business saw a 3bps margin reduction year-on-year due to the removal of the minimum investor charge and drawdown charge, the FCA sunset clause and general industry margin pressures, the combination of which has adversely impacted revenue by £5 million. Quilter Cheviot margin has decreased by 3bps compared with prior year due to a reduction in commission levels and cash yields which have been experienced industry wide, reducing revenue by £3 million. Reduced margins in International offshore were experienced due to regulatory and competitive pressures.
Reshaping and strengthening of the executive committee incurred £5 million of restructuring costs and £2 million of costs associated with the Managed Separation activity in H1 2016 were also incurred, as well as continued investment in governance and controls.
Old Mutual Wealth is focused on driving good customer outcomes by ‘doing the right thing’.
During this year’s periods of uncertainty Old Mutual Wealth remained close to customers, continuing to deliver relevant and attractive products and great service.
On 1 July 2016, Old Mutual Wealth announced that it will apply a 1% cap on Heritage pensions exit charges for customers aged over 55 years and changed the fee structure on the Heritage pension products to deliver better customer outcomes ahead of the expected regulatory deadline of March 2017. This will improve access to pension investments for customers following the UK Government’s pension reforms introduced in 2015. On 3 March 2016 the Financial Conduct Authority (FCA) published a report setting out its findings from its thematic review of the fair treatment of long-standing customers in life insurance. At the same time, the FCA announced that it had commenced investigations into the behaviour of six of the 11 firms included in the thematic review, including Old Mutual Wealth. Old Mutual Wealth continues to cooperate fully with the FCA’s investigation.
Old Mutual Wealth is committed to transforming its IT infrastructure which will enable it to take advantage of the expected substantial opportunities in the market place. The Platform transformation is designed to ensure that client and adviser portals retain their leading-edge features and ability to adapt in a rapidly changing technological environment and maintain its position as a leading platform for advisers. Since March, focus has been on increasing risk mitigation and this is being worked through with suppliers and project advisers. Accenture has been appointed as the programme delivery partner across the entirety of the programme. KPMG continues to provide assurance through the programme. IFDS and DST are now going through a similar third party assurance process.
Old Mutual plc announced its intention to deliver Old Mutual Wealth into the hands of Old Mutual plc’s shareholders by way of a demerger and listing on both the London and Johannesburg stock exchanges. This remains subject to change and stakeholder consent and/or readiness of the underlying business. Managed Separation is a clear endorsement of Old Mutual Wealth’s strategy and presents an exciting opportunity.
Work is underway to plan and develop structure and capabilities in the run up to the eventual separation of Old Mutual Wealth from Old Mutual plc. Old Mutual Wealth reshaped its Executive Committee to ensure business readiness for an independent future, enhancing the focus on operating and control functions. Steven Braudo, Chief Operating Officer, and Iain Wright, Chief Risk Officer, both joined the company in 2016. The process of appointing an independent non-executive Chairman is underway. It is expected that further costs will be incurred during this period in relation to the preparation for this activity, including investment in governance and controls.
Building awareness of Old Mutual Wealth and Old Mutual Global Investors continued in H1 2016. The inaugural Old Mutual Wealth Cup held in May at Twickenham was a sell out with a stadium audience of 80,000, and many more watching it on television.
Old Mutual Wealth’s commitment to boosting young people’s financial awareness goes from strength to strength. A new partnership with MyBnk has enabled the launch of a financial education programme in secondary schools across the Southampton region in H1 2016. Old Mutual Wealth also continues to work with Young Enterprise to deliver the Your Horizon programme which engages with students aged 18-24 from deprived areas to help them raise their aspirations and develop their employability skills.
Old Mutual Wealth continues to be recognised for performance and service and received a number of awards in H1 2016. It achieved a Defaqto Gold rating for platform service and was awarded a platinum platform rating by Adviser Asset. Old Mutual Global Investors and Quilter Cheviot were recognised at the City of London Wealth Management awards and Intrinsic won ‘Best Large Network’ award for the third year running at the Mortgage Strategy Awards. In July, Old Mutual Global Investors won two awards at the Investment Week 2016 Fund Manager of the Year awards.
Old Mutual Wealth regrets to announce that Simon Davies, Jane Hanson and Andy Pomfret have decided to step down from the Old Mutual Wealth board in October 2016. Old Mutual Wealth has been transformed over the past three years and would like to thank each of them for their considerable efforts in driving and reshaping the strategy and governance and for supporting the leadership during that time. Old Mutual Wealth wishes them well in the future.
The Investment Division comprises Old Mutual Global Investors and Quilter Cheviot, two highly respected investment businesses managing clients’ money.
FUM managed by Old Mutual Global Investors and Quilter Cheviot represent over 40% of the total Old Mutual Wealth FUM and vertically integrated FUM are £11.5 billion, up from £10.9 billion at 2015 year end, most of which is via old Mutual Global Investors.
In April the multi-asset team launched a new range of managed solutions, the Old Mutual Compass Portfolios, specifically designed to cater for international investors. These funds support the investment proposition of AAM Advisory.
Discretionary investment management - Quilter Cheviot:
NCCF for H1 2016 was £0.4 billion, in line with those of the prior year period, including flows in the two months pre-acquisition. FUM increased by 7% from the start of the year to £19.0 billion (December 2015: £17.8 billion).
Quilter Cheviot has expanded its geographic footprint by opening an office in Dubai. In collaboration with the International offshore business, Old Mutual Wealth now offers discretionary fund management services to its international client base.
Asset Management - Old Mutual Global Investors:
NCCF increased by 60% on H1 2015 to £1.6 billion (H1 2015: £1.0 billion). Gross sales increased by 38% on H1 2015 to £ 7.0 billion (H1 2015: £ 5.1 billion) with strong sales into the Old Mutual Global Equity Absolute Return fund (‘GEAR’), Old Mutual North American Equity fund, Old Mutual UK Specialist Equity fund and the Old Mutual Cirilium Portfolios range. These funds complement those managed by the Old Mutual UK Equities, European Equities, Asian Equities, Absolute Return Government Bond and Fixed Income teams. FUM increased by 9% to £27.0 billion on the start of the year (December 2015: £24.7 billion). Vertically integrated gross flows into Old Mutual Global Investors are £2.4 billion at H1 2016, above prior year (H1 2015: £1.9 billion). Old Mutual Global Investors manages 14% of Platform assets, up from 13% at H1 2015.
At H1 2016, investment performance at Old Mutual Global Investors showed 67% of single strategy funds above target over 3 years, compared to 67% at December 2015. The largest absolute return fund, GEAR, has delivered 4.5% over three years and continues to outperform its peers, but is marginally below its target of 5%. GEAR continues to experience strong inflows indicating that client sentiment remains positive, as investors continue to look for alternative investment options delivering positive returns in the low interest rate environment.
Performance of the Old Mutual UK Alpha fund has been below median for a while. This fund is designed as a long-term holding and does experience periods of short-term underperformance. It continues to be recognised by investors as a vehicle to achieve capital growth from UK equities and has delivered an annualised return of 9.4% since inception, compared to an average annual return of 2.5% from the FTSE All-Share.
Investment performance is a key part of delivering good customer outcomes. Good progress continues to be made on the evolution of the multi-asset fund range following changes to the management team to address the below-benchmark investment performance. More recently, changes were made to the Absolute Return Government Bond team due to differences in opinion on future strategy. Subsequently there have been minimal outflows from the Old Mutual Absolute Return Government Bond fund and performance has continued to improve. In addition, Old Mutual Global Investors made two new hires on the Fixed Income desk and launched the Old Mutual UK Specialist Equity fund and the Old Mutual Gold & Silver fund.
The Distribution Division leads Old Mutual Wealth’s multi-channel advice strategy, encompassing the UK and International Platforms, Intrinsic and AAM Advisory. This division is focused on providing advice-driven wealth solutions for customers to deliver great customer outcomes and enhance profitability.
Distribution - UK Platform:
NCCF increased by 17% to £1.4 billion compared to H1 2015 (£1.2 billion). This was predominantly driven by strong pension net sales growth, up 50%. Gross salesincreased by 5% to £3.2 billion compared to H1 2015 (£3.0 billion). FUM increased by 6% to £36.5 billion since the start of the year (December 2015: £34.5 billion). Pension sales are 33% higher than prior year as the flexible drawdown pension continues to meet investors’ needs following last year’s pension reforms. Consistent with wider industry trends, ISA sales were 17% below prior year as the opportunity for large pension contributions made ISAs less attractive.
WealthSelect, the managed portfolio service launched in 2014, surpassed £2 billion in assets under management shortly after its two-year anniversary and continues to receive good new asset flows.
Distribution - Old Mutual Italy:
NCCF decreased to £0.1 billion compared to the same period last year (H1 2015: £0.4 billion). The business has been impacted by wider market uncertainty, with local market seeing a shift towards traditional life and guaranteed products, which we chose not to offer, and clients switching into lower margin cash holdings in turbulent market conditions.
On 9 August, Old Mutual plc announced it has agreed to sell Old Mutual Wealth Italy to ERGO Italia, owned by Cinven, for €278 million cash, plus interest to completion.
Distribution - Old Mutual International:
NCCF decreased by 33% to £0.2 billion on H1 2015 (£0.3 billion) as economic conditions deteriorated in some regions and sales of QROPs (an offshore pension popular with expatriates) were lower following last year’s pension reforms which removed some of the benefits of transferring to a QROPS for certain customers. FUM increased by 6% to £16.9 billion since the start of the year (December 2015: £16.0 billion).
Old Mutual Wealth is seeking to transform the way that international offshore business is conducted supporting advisers and helping them understand how the combination of regulatory convergence and shifting client expectations are creating new opportunities. Product and offering design is increasingly focusing on an integrated business model utilising Old Mutual Wealth’s own asset management capabilities.
Financial Advice - Intrinsic Financial Services:
Intrinsic continues to secure increasing fund flows for Old Mutual Wealth’s businesses. The restricted channel accounts for 33% of Platform NCCF year to date. Intrinsic also contributed 26% of Old Mutual Global Investors’ year to date NCCF through the Old Mutual Cirilium and Old Mutual Generation Portfolios ranges.
Old Mutual Wealth Private Client Advisers has reached an agreement to acquire Devon-based financial planning firm, DQS Financial Management, which will add five financial planners who manage £200 million of investable assets on behalf of 650 clients. On 8 August the acquisition of Beaumont Robinson, a West Yorkshire based financial planning firm, was announced, subject to regulatory approval. This will add six financial planners who manage £250 million of investable assets on behalf of 850 clients.
Restricted financial planners have grown to 1,318 in Intrinsic (H1 2015: 988, FY 2015: 1,230), and 22 advisers into Old Mutual Wealth Private Client Advisers. The remaining increase in restricted financial planners has been achieved through existing “independent” advisers choosing to convert to “restricted” status.
The Financial Adviser School (‘the School’) has 26 existing students and anticipates reaching 75-100 students before the year end. The School is currently recruiting additional resources to help it exceed that capacity next year. The School is open to Old Mutual Wealth and other advisers.
Financial Advice – AAM Advisory:
Old Mutual Wealth is committed to improving the strength and sustainability of the financial advice industry and improving customer access to advice and in March 2016completed the acquisition of AAM Advisory, a leading expatriate adviser business in Singapore, adding 31 advisers.
Overall net outflows reduced to £0.5 billion (H1 2015: £0.6 billion) on Heritage closed books as a result of improved surrender rates.