ISSUED 29 JANUARY DFM SECTOR Octopus Investments FINANCIAL STRENGTH ASSESSMENT

Transcription

1 ISSUED 29 JANUARY 2018 DFM SECTOR Octopus Investments FINANCIAL STRENGTH ASSESSMENT

2 Octopus Investments D F M S E C T O R ABOUT THIS FINANCIAL STRENGTH ASSESSMENT This AKG report and the analysis and ratings contained within it provide assessment of financial strength and associated considerations. Financial Strength is focused on the ability of a company to deliver ongoing operational capability in the interest of its customers and in line with their fairly held expectations. AKG s perspective in the assessment of financial strength is wholly that of a customer of a product or service. From that foundation, this analysis is specifically designed to inform financial advisers and assist in their required understanding of a company s operational financial strength. Given the underlying customer perspective, the financial strength of companies needs to be focused at an operational level, specifically on the company that is effecting the product or service that a customer is selecting. This is important, because from the customer s perspective it is that company that needs to survive in a form that maintains the requisite operational characteristics to meet their fairly held requirements. And it is thus at this level that the selection needs of the customers advisers must be met. This contrasts to credit rating, which will be undertaken at group or parent company level where investment or debt placement etc. is made. Further details on how analysis is undertaken is provided at the end of this report and may also be obtained from AKG. TABLE OF CONTENTS Company Analysis Rating & Assessment Commentary... 3 Ratings... 3 Summary... 3 Commentary... 3 Group & Parental Context... 5 Background... 5 Group Structure (simplified)... 5 Company Analysis: Octopus Investments Ltd... 6 Basic Information... 6 Operations... 7 Strategy... 9 Key Company Financial Data Guide Introduction Rating Definitions About AKG CONTACT INFORMATION AKG Financial Analytics Ltd, Anderton House, 92 South Street, Dorking, Surrey, RH4 2EW Tel: +44 (0) akg@akg.co.uk Web: Guide AKG Financial Analytics Ltd 2 29 January 2018

3 Octopus Investments D F M S E C T O R Rating & Assessment Commentary Rating & Assessment Commentary RATINGS Overall Financial Strength DFM SECTOR STRONG OCTOPUS INVESTMENTS LTD B Supporting Ratings Group & Parental Context Service Image & Strategy Business Performance Octopus Investments Ltd SUMMARY Both the company and wider group continued to grow with funds under management now exceeding 7bn Solvency coverage, which is disclosed at a group level remained very healthy A significant presence in its chosen specialist sectors Highly regarded by financial advisers and can point to a good service track record. Company Analysis COMMENTARY Financial Strength Ratings Octopus Investments Ltd Whilst smaller than some of its more mainstream competitors, Octopus Investments has a significant presence in its chosen specialist sectors. Octopus Investments Ltd has been operating in the UK market for 17 years. It has been operating profitably and has seen healthy growth in assets under management, turnover and profits in recent years. Pillar 3 disclosures are at a consolidated level and demonstrate a very good level of capital resources coverage. Octopus Investments Ltd is the primary operating company within the group, accounting for 44% of the group's revenue in the year ending 30 April Guide AKG Financial Analytics Ltd 3 29 January 2018

4 Octopus Investments D F M S E C T O R Rating & Assessment Commentary Group & Parental Context Service Rating Octopus states that it receives positive Net Promoter Scores. Octopus continues to place great store in its service delivery to advisers and customers. Being helpful is one of its three core business values. Octopus is seen to provide strong technical service to advisers via online, telephone and face-to-face support. Octopus Investments remained highly regarded by Financial Advisers, evidenced by its consistently high performance in service awards. Image & Strategy Rating Octopus is trying to do things a little differently in the financial services market. Octopus's stated goal is to 'bring customerled product design to an industry that is usually better known for complication and jargon'. Octopus is guided by three core values - be helpful, be straightforward, be bold. Octopus has been working to diversify its proposition across sectors and invest in digital development. It continues to target innovation via Octopus Labs, and this resource is now responsible for all product/proposition development. Core distribution focus remains the intermediary channel and Octopus continues to operate with a comprehensive new business presence. Octopus has established a good foothold in the market and is now well recognised as a provider of specialist tax planning investments/products. It is important that Octopus pursues opportunities for growth with its Multi Manager and Octopus Portfolio Manager (OPM) propositions. Business Performance Rating Another good year for Octopus Investments Ltd, with increases in funds under management, turnover and profit, which were replicated at group level. Octopus Investments Ltd's turnover and pre-tax profit increased by 15% and 38%, respectively and by 128% and 171% at consolidated group level. Solvency coverage, which is reported at a consolidated level, increased to a very healthy level, boosted by retained profits approaching 100m. Company Analysis October 2015 saw the group acquire Mercury Energy Supply Ltd, renamed as Octopus Energy Ltd. Octopus Choice, a P2P lending online platform was also launched. April 2016 saw the closure to new investments of Octopus's EISs. Octopus continued to make strategic investments in care home provision and construction, retirement villages, private hospitals and schools. The business continues to look at ways to create and utilise new technology and to develop systems, which can help to deliver operational efficiencies. Risk and compliance teams and functions have expanded in recent times as the business continues to grow. From a regulatory perspective, there has been a focus on preparing for MiFID II, GDPR and SM&CR. Guide AKG Financial Analytics Ltd 4 29 January 2018

5 Octopus Investments D F M S E C T O R BACKGROUND Group & Parental Context Octopus was established in 2000 by three founders, previously at Mercury Asset Management: Simon Rogerson, Chris Hulatt and Guy Miles. Across all its businesses, Octopus has around 500 employees, more than 150,000 customers, works with over 3,000 financial advisers and has more than 7bn of funds under management. There are now six businesses: Octopus Investments - one of the UK s fast-growing fund management businesses with leading positions in several specialist sectors including smaller company investing. Octopus Investments is a leading provider of Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EISs) and Business Property Relief based inheritance tax solutions. Octopus Healthcare - in October 2014, the group acquired an 80% shareholding in MedicX Holdings Ltd, renamed as Octopus Healthcare Sub Holdings Ltd, which along with its subsidiary companies undertakes healthcare property fund management and property management services. Octopus Ventures - a business division of Octopus Investments Ltd and a provider of Venture Capital. Octopus Property - a business division of Octopus Investments Ltd, a provider of property finance and the trading name of Bridgeco Ltd, Fern Trading Ltd, Nino Ltd, Octopus Property Lending Ltd (renamed from Rednel Ltd), Octopus Co-Lend Ltd and Dragonfly Finance S.ar.l. Octopus Energy - October 2015 saw the acquisition of Mercury Energy Supply Ltd, renamed as Octopus Energy Ltd, which has entered into the retail energy supply sector for electricity and gas. Octopus Labs - a business division of Octopus Investments Ltd and Octopus' Fintech Innovation unit. October 2015 saw the launch of Octopus Choice, an online platform allowing individuals and companies to participate in the peer-to-peer (P2P) market (as lenders) investing in asset backed loans. Octopus Capital Ltd also owns around 11% of Lightsource Renewable Energy Ltd, a developer of renewable energy sites and around 12% of Brooks Macdonald Group plc. The group sold its 27% shareholding in Duncton Group Ltd in GROUP STRUCTURE (SIMPLIFIED) AKG Financial Analytics Ltd 5 29 January 2018

6 Octopus Investments Ltd D F M S E C T O R Company Analysis: Octopus Investments Ltd BASIC INFORMATION Ownership & Control Octopus Capital Ltd Year Established 2000 Country of Registration UK Head Office 33 Holborn, London, EC1N 2HT Contact Key Personnel Role Group Chairman Group Chief Executive Officer Group Chief Financial Officer Group Chief Operating Officer Group Founder and Director Group Head of Unquoted Investments Managing Director, Octopus Investments CEO, Octopus Healthcare CEO, Octopus Ventures CEO, Octopus Property CEO, Octopus Energy CEO, Octopus Labs Name M J Cooper S A Rogerson H Cowing C Stent C R Hulatt A J Seabright P S Latham M Adams A Cole M Berti G Jackson R J Wazacz Company Background Octopus Investments Ltd was established as Octopus Capital Ltd in March 2000 and renamed as Octopus Asset Management Ltd in April 2000 and Octopus Investments Ltd in July It now manages around 7bn in assets, spread across VCTs, EISs, Inheritance Tax products, OEICs, institutional funds, peer to peer lending (Octopus Choice) and the MedicX fund. It is Octopus's primary trading company and its principal activity is fund management, with operations in several sectors including energy, healthcare, property and smaller companies. Simon Rogerson remains Chief Executive of the group and Octopus Investments. Octopus Investments remains the largest entity within the group. The average number of staff increased from 400 to 470 in AKG Financial Analytics Ltd 6 29 January 2018

7 Octopus Investments Ltd D F M S E C T O R OPERATIONS Governance System and Structure Octopus Investments places a high level of importance on its risk and governance responsibilities. There is a comprehensive set of functions and committees in place to ensure that investment activities do not breach their guidelines. In particular, given some of the ownership and management structures, Octopus Investments needs to continue to ensure that conflicts of interest are mitigated and that deals are done at arm's length and on fair terms. While the Octopus board of directors and senior management team are intrinsically involved in the operation of the various investment and governance committees, they also seek to achieve a balance of views and expertise through the introduction of independent stakeholders to these committees. It should be seen as a positive step to encourage input, and push back where necessary, from these independent stakeholders. Octopus also engages with other specialist companies, including legal and accountancy practices, where its external expertise and oversight can validate the Octopus approach. The overarching objective of Octopus's Multi Manager Investment Committee is to 'ensure that the funds assets are invested appropriately within the risk appetite determined by the relevant investment mandate'. Duties of this committee include setting and reviewing internal objectives for each of the funds and monitoring effectiveness and implementation of the investment mandates. Compliance with the requirements of the FCA Handbook and any other internal limits or requirements is also monitored, as is the effectiveness of the monthly investment performance meetings. The policy on stock lending, treasury and counterparty exposures is also reviewed by this committee. Risk Management The Management Committee identifies, assesses and manages the risks associated with the company's business objectives and strategy. The main risks are identified as: External, primarily changes to the political, legal and regulatory environment Operational, arising from a weakness or failure in a business's systems and controls Business, relating to fund performance and reputation Credit Liquidity The Risk and Compliance Team at Octopus Investments has been expanded in recent times as the business has continued to grow. The team has over 15 staff, overseen by a Head of Compliance and Head of Internal Audit, covering a range of roles/disciplines including compliance, internal audit, monitoring, risk management and complaints. Staff within the wider business are also tasked with recognising and co-ordinating risk related activities. A new system to support risk and compliance processes has also been adopted. From a regulatory risk perspective, the team has been working on preparing the business for MiFID II, GDPR and SM&CR. Project management support has also been provided to the separate regulatory workstreams and there has been collaboration with other relevant teams in the business. MiFID II related activities have included preparation for recording of all customer calls, systems enhancements to accommodate more detailed reporting and a review of product governance requirements. Octopus is also planning to roll out a new suite of MiFID II compliant customer literature and illustrations in early AKG Financial Analytics Ltd 7 29 January 2018

8 Octopus Investments Ltd D F M S E C T O R Administration The operations team at Octopus, overseen by the Head of Operations, who reports to the Chief Operating Officer, comprises over 45 staff and deals with activities including commissions, payments, applications and data input. The business continues to look at ways to create and utilise new technology and develop systems which can help to deliver operational efficiencies. Octopus Investments has a dedicated team of 13 investor facing customer service professionals. There is also a team of 2 full time staff whose job is to deal with all complaints efficiently and fairly, in line with the Octopus TCF policy and a dedicated Estates and Probate team who deal with all queries from the executors of deceased clients and their advisers. The Octopus Multi Manager & Octopus Portfolio Manager team has grown in recent times and there is now a staff of 14, including an Investment Director, two Fund Managers, a Senior Fund Manager, a Senior Investment Manager and three Investment Analysts. Benchmarks Octopus has a declared NPS score of 73. Octopus has been highly regarded for service in recent years being awarded 5 Stars in the Investments category at the 2014, 2015, 2016 and 2017 Financial Adviser Service Awards. In 2017, Octopus was also awarded with 5 stars in the Investments category at FT Adviser s Online Innovation and Service Awards and won Best BPR Investment Manager at the Growth Investor Awards. In the BWD Search & Selection 2016 BDM Quality Census, Octopus was placed top for Field-Based and Tele-Based BDMs in the Investment Providers category. Octopus won 2 awards at the 2017 Investment Life & Pensions Moneyfacts awards: Octopus Choice won the award for innovation, and Octopus won Best Tax and Estate Planning Provider for the second year in a row. Two of Octopus's founders, Simon Rogerson and Chris Hulatt, were recently named as winners of EY UK Entrepreneur of the Year and will represent the UK at the EY World Entrepreneur of the Year Forum. Outsourcing Octopus outsources some of its operational functions to the administrative services and technology provider, IFDS (UK), now wholly owned by DST Systems, Inc. Octopus outsources some of its printing and communications activities to Perivan Ltd. AKG Financial Analytics Ltd 8 29 January 2018

9 Octopus Investments Ltd D F M S E C T O R STRATEGY Market Positioning Octopus has been working to diversify its proposition. Octopus group s six divisions, referenced earlier in this report, now incorporate investment management, venture capital, property lending, renewable energy generation, investing in healthcare and fintech. Each division is being encouraged to run under its own guidance and leadership, but within the overarching reporting structure of the Octopus group and Board saw Octopus change its 4 core values - customer obsession, better and better, focus on impact and personality matters to 3 - be helpful, be straightforward, be bold. New product/proposition development work is being undertaken within Octopus Labs and launches will then be rolled out by the relevant division and its business development resource. A digitalisation project is also underway to target enhanced capabilities and efficiencies across the business. Octopus is focused on intermediary distribution and has a large business development team of over 45 people in a variety of roles including Business Development Managers, Area Sales Directors and Business Line Managers. The business development team s key role is to develop relationships with financial advisers across the UK, including Scotland and Northern Ireland, focusing on Octopus's range of specialist tax planning products. Remote support is provided by a telephone team based in London. Due to the more complex nature of some of the solutions within the Octopus Investments range there is also a technical team to provide qualified support to discussions with financial advisers. The Octopus Multi Manager & Octopus Portfolio Manager Team also includes four roles focused on the sales and marketing of the proposition, working in collaboration with business development resources in the wider business. There is a dedicated Strategic Partnerships team which focuses on developing and managing business-to-business relationships with key distribution partners, including OPM partnerships. They span a number of distribution channels, including: financial adviser networks, national accounts and service providers; private banks and wealth managers; family offices and high net worth individuals; solicitors and accountants; investment wrap platforms. OPM is available on the following investment wrap platforms: 7IM, Ascentric, Aviva, Elevate, Novia, Nucleus and Transact. Octopus is seeking further growth of AuM via these third party platform relationships. Octopus s Multi Manager team creates investment solutions, such as risk-rated funds, for large financial adviser groups. Core distribution focus remains on the development of such investment management relationships with large intermediary firms. The Octopus team manages money on behalf of Openwork and Lighthouse. The partnership, with Luceo Asset Management, a wholly owned subsidiary of the Lighthouse Group, was announced in September An investment management relationship is also in place with the Charities Aid Foundation. Octopus is seeking to attract more assets under management through adviser businesses which are reviewing their investment propositions and seeking support with Centralised Investment Propositions (CIPs). Octopus is also targeting distribution opportunities for its absolute return fund capability with external discretionary fund managers (DFMs). It established Octopus Labs in 2016 to support FinTech start-ups and work on the development of new products for the market and/or Octopus. AKG Financial Analytics Ltd 9 29 January 2018

10 Octopus Investments Ltd D F M S E C T O R Proposition Octopus Investments markets a range of investment products and propositions available to financial advisers and investors, majoring on tax efficient solutions, summarised as follows: VCTs - a range of VCTs of which one is currently open, the Titan VCT. The Apollo VCT being closed to new investment, as is the AIM VCT, having reached its capacity Inheritance Tax Solutions - a flagship proposition, which includes Octopus Inheritance Tax Service, Octopus AIM Inheritance Tax Service and Octopus AIM Inheritance Tax ISA EISs - Octopus EIS and Octopus Eureka, both currently closed to new investment DFM service - OPM, an outsourced hybrid multi manager/managed portfolio service for financial advisers Octopus Choice - a peer to peer lending product provided by Octopus Co-Lend Ltd Octopus Cash - a cash deposit based product provided by Octopus Co-Lend Ltd, which is managed on a day to day basis by Octopus Institutional Deposits Ltd Octopus Lifestyles - a lifetime mortgage product provided by Octopus Property Lending Ltd OPM consists of ten risk targeted investment profiles. Each is diversified across different asset classes, while aiming to deliver the best investment performance for the amount of risk that the investor is willing to take. Each investment profile is made up of a combination of different holdings of the FP Octopus Investment Funds (the Foundation Funds ). This is a set of six funds which, when combined with cash holdings, create each of the ten investment profiles. The Foundation Funds are multi manager funds. Each investment profile features a number of different funds, all overseen by Octopus. Octopus Investments has key strategic fund management partnerships in place with third parties including Omnis Investments, and the Charities Aid Foundation. Octopus Investments manages the Omnis Multi Manager funds, a range of three risk-rated funds - Adventurous, Balanced and Cautious - on behalf of Omnis Investments Ltd. Omnis Investments is wholly owned by Openwork Holdings Ltd and the Omnis Investment funds are available exclusively through the financial advisers of Openwork Ltd. Octopus Investments provides a replication of its OPM proposition for the Charities Aid Foundation (CAF). The CAF Managed Portfolio Service, aimed at trustees and/or board members of small and medium sized charities, offers eight risk rated portfolios - Cash Plus, Defensive Capital Growth, Conservative Capital Growth, Moderate Capital Growth, Progressive Capital Growth, Managed Equity Growth, Advanced Equity Growth and Global Equity Opportunities. Octopus also manages several institutional portfolios totalling 1bn. The 'go-to' resource for advisers is the Octopus Investment Adviser Centre which houses a document library, case studies, news and insights as well as information about the adviser academy, adviser events and webinars. The Adviser Centre also houses the secure portal log-in from where advisers can access up-to-date information on client investments, including valuations. Due to the nature of its specialist product range, from a tax planning perspective, there is a big emphasis on producing education material for its financial adviser audience. Octopus Investments hosts a series of Octopus Live events for advisers across the UK, again aiming to provide advisers with ideas and support relating to the product range. As part of the toolkit for advisers, Octopus has recently launched a Residence nil-rate band calculator. For all Octopus products, the financial adviser remains responsible for the relationship with the client and in particular the process relating to ascertaining attitude to risk and capacity for loss. Octopus states that it can map OPM investment profiles to the output of the adviser s selected risk profiling tool, including the Dynamic Planner Risk Profiler provided by Distribution Technology, as well as providing suitability paragraphs to support report writing. The Octopus Adviser Academy, an online learning portal for tax-efficient investing, was launched in September Octopus also hosts a series of seminars and webinars through the year aimed at sharing information on its core products with advisers. AKG Financial Analytics Ltd January 2018

11 Octopus Investments Ltd D F M S E C T O R The group launched a P2P lending product in the name of Octopus Choice, provided by Octopus Co-Lend Ltd, a company specifically established for this purpose. The Octopus Choice proposition, the first to emerge from Octopus Labs, provides a route for retail clients to participate in the P2P market (as lenders). Octopus Choice is effectively a platform facilitating the introduction of borrowers and lenders. Octopus Choice is now available in an ISA. AKG Financial Analytics Ltd January 2018

12 Octopus Investments Ltd D F M S E C T O R KEY COMPANY FINANCIAL DATA Last 3 reporting periods up to 30 April 2016 Capital Resources Disclosures Available capital resources Capital resources requirement (CRR) Excess capital resources CRR coverage ratio (%) The table above is blank because there is no disclosure for Octopus Investments Ltd, since Octopus Capital Ltd is subject to consolidated supervision by the FCA for regulatory capital purposes. Octopus Capital Ltd is the UK consolidation group which at the date of its last disclosure, 30 April 2016, consisted of four firms regulated by the FCA: Octopus Investments Ltd, Octopus Healthcare Adviser Ltd, Octopus Property Lending Ltd and Octopus AIF Management Ltd. The group reported regulatory capital of 143.4m [2015: 42.8m] as at 30 April 2016 and a Pillar 1 and Pillar 2 capital resources requirement of 17.3m [2015: 16.2m], giving a very healthy coverage of 829% [2015: 265%]. For its own purposes, Octopus Capital holds a buffer of an extra 30% of the Pillar 1 requirement, this takes its own internal requirement to 22.2m [2015: 19.9m] and coverage for this purpose is 647% [2015: 215%]. Statement of Financial Position Assets Current liabilities (25.7) (39.1) (32.7) Long-term liabilities (1.1) (3.2) (3.7) Net assets Statement of Changes in Equity Equity at start of period Movement due to: Share capital and premium Retained earnings Other Equity at end of period Shareholders' funds increased to 48.1m [2015: 35.1m]. Whilst the company has no borrowing [2015: nil], there are operating lease commitments of 26.0m [2015: 28.5m]. Previously having no debt, the group raised a new loan of 25m during As at the 2016 year-end there was 5m outstanding [2015: 23.3m], repayable in three equal instalments ending September 2017, 18.3m having been repaid in There were further loans of 10.9m, obtained through acquisitions. During the year there was a share reduction of 4.5m [2015: 1.7m issued] and dividends paid of 27.8m [2015: 3.8m]. Shareholders Funds increased to 171.6m [2015: 78.8m, restated] boosted by retained profits of 99.4m. Including minority interests of 1.0m, capital employed increased to 172.6m [2015: 80.5m]. The acquisition of Octopus Healthcare Sub Holdings Ltd in 2015 gave rise to Goodwill of 35.7m being reflected in the balance sheet. Total Goodwill amounted to 25.0m as at April During the year Octopus Capital Ltd received dividends of 19m [2015: 8m] from its primary subsidiary Octopus Investments Ltd. AKG Financial Analytics Ltd January 2018

13 Octopus Investments Ltd D F M S E C T O R Income Statement Revenue Other operating income Operating expenses (59.2) (78.9) (84.3) Operating profit (loss) Other gains (losses) Profit (loss) before taxation Taxation 0.3 (5.5) (4.2) Profit (loss) after taxation Other comprehensive income Dividends (10.6) (8.0) (19.0) Retained profit (loss) Financial Ratios 2014 % 2015 % 2016 Operating margin Pre-tax profit margin Employee costs as a % of revenue % Octopus Investments Ltd reported an increased pre-tax profit of 35.5m for the year ended 30 April 2016 [2015: 25.7m] on turnover which also increased from 104.1m to 119.3m. Within this, operating profits increased from 25.2m to 35.1m. A dividend of 19.0m was paid [ m]. Overall expenses increased from 78.9m (restated) to 84.3m. Within this, cost of sales increased from 8.2m to 10.2m, with administrative expenses increasing from 70.5m to 74.0m. Net capital expenditure and investment, primarily software, leasehold property improvements and equipment, reduced from 11.3m to 7.5m. The return on assets was 64.9% [2015: 57.6%]. The consolidated group made pre-tax profit of 130.8m on revenue of 272.0m in the year ending April 2016 [2015: revenue 119.2m, profit 48.3m, restated]. The pre-tax profit margin improved to 48.1% [2015:40.5%, restated]. Profit after tax was 126.5m [2015: 36.1m, restated]. Revenue is derived mainly from investment management activities (the primary trading company Octopus Investments Ltd) and the sale and distribution of investment solutions to retail investors. Consolidated turnover and profit were boosted by dividend income received from investments of 105m [2015: nil]. The average number of monthly staff in the group increased significantly from 334 to 439. Statement of Cash Flows Net cash generated from operating activities Net cash used in investing activities Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at end of period (3.9) (10.6) (7.1) (10.6) (8.0) (19.0) (0.6) Assets under Management (AuM) Assets at start of period 3, , ,300.0 Inflows Outflows Net market and other movement Assets at end of period 3, , ,000.0 Growth rate (%) Net inflows as % of opening AuM Net cash generated from operating activities increased by 86% to 36.7m in Cash and cash equivalents also increased from 27.4m to 38.1m. AKG Financial Analytics Ltd January 2018

14 Octopus Investments Ltd D F M S E C T O R Octopus Investment Ltd's Assets under Management (AuM) increased from 4.3bn to 6,0bn in 2016 and further to 7.2bn as at 30 June 2017, with 3.5bn being managed on a discretionary and 3.7bn on a non-discretionary basis at this date. As at 30 June 2017, the breakdown by product was: Unlisted IHT - 1.8bn, AIM ISA - 0.6bn, AIM ITS - 0.5bn, EIS - 0.5bn, VCT - 0.8bn, OPM - 1.3bn, Institutional - 1.6bn and Choice - 0.1bn. AKG Financial Analytics Ltd January 2018

15 Octopus Investments D F M S E C T O R INTRODUCTION Guide For over 20 years AKG has particularly focused on the financial strength requirements of financial advisers, who when acting on behalf of their clients, need to ascertain a company's ability to deliver sustained provision. From this customer perspective, the financial strength of companies needs to be focused at an operational level, specifically on the company that is effecting the product or service that a customer is selecting. This is important, because from the customer s perspective it is that company (not some higher corporate entity) that needs to survive in a form that maintains the requisite operational characteristics to meet their fairly held requirements. And it is thus at this level that the selection needs of the customers advisers must be met. It is also important to understand the sector approach (comparative peer groups) that is adopted in financial strength assessment and rating process. At AKG, this is again driven by the end customer perspective and the fact that assessment is designed solely for this purpose, i.e. as a component in helping customers advisers to select between comparable companies competing to deliver relevant products or services. AKG s focus and approach has remained consistent over the years since it commenced assessment and rating support for the market. However, coverage, format and presentation has rightly evolved over this period, in line with the needs and expectations of assessment and rating users in the market. And AKG considers further changes on a continual basis. Further details including an explanation of what is included in the assessment reports and coverage can be found online at AKG s process for assessment and rating is to use a balanced scorecard of measures and comparative information, relevant to the companies contained within each peer group. This is gathered via Public Information only for non-participatory assessments and public information plus company interactions with companies for participatory assessments. Further details on AKG s process can be found at This includes further information on the different participatory and non-participatory basis and for companies wishing to learn more about participatory assessment AKG is pleased to outline this and welcomes contact. This is a participatory assessment. RATING DEFINITIONS Overall Financial Strength Rating The objective is to provide a simple indication of the general financial strength of a company from the perspective of those financial advisers who when acting on behalf of their clients need to ascertain a company's ability to deliver sustained operational provision of products or services. The overall rating inherently reflects the mix of business within the company, since different types of customer or policyholder have different requirements and expectations, and the company may have particular strengths and weaknesses in respect of its key product or service areas. However, it also takes account of comparison across the sector in which it is assessed. The rating takes into account those of the following criteria which are relevant (depending upon the company's mix of business in-force): capital and asset position, expense position and profitability, any specifically onerous elements such as guarantees, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), operational capability, management strength and capability, strategic position and rationale, brand and image, AKG Financial Analytics Ltd January 2018

16 Octopus Investments D F M S E C T O R typical fund performance achievements or product / service features, its operating environment and ability to withstand external forces. Rating Scale A B+ B B- C D Superior Very Strong Strong Satisfactory Weak Very Weak Not applicable Service Rating The objective is to assess the quality of the organisation's service to the intermediary market in respect of the brand concerned. Criteria taken into account include: performance in surveys, awards and benchmarking exercises (external and internal), the organisation's philosophy, service charters, the extent of investments designed to improve service, and feedback from intermediaries. Rating Scale Excellent Very Good Good Adequate Poor Not Rated Image & Strategy Rating The objective is to assess the effectiveness of the means by which the organisation currently positions itself to distribute its products for the brand concerned and the plans it has to maintain and/or develop its position. Criteria taken into account include: overall trends in the company s market share position, brand visibility and reputation, feedback from intermediaries and industry commentators, and AKG s view of the company s general strategy. Rating Scale Excellent Very Good Good Adequate Poor Not Rated Business Performance Rating This review is an assessment of how the company and the brand has fared against its peers, and how it is perceived externally. Effectively this is how it has performed recently in the market. Whilst it will include performance indicators from the most recent available statutory reporting (report and accounts and SFCRs in the case of insurance companies, for example) it will also draw on other recent key performance elements before and after such disclosure, up to the point at which the assessment is undertaken. Criteria taken into account include: increase/decrease in market shares, expense containment, publicity good or bad, press or market commentary, regulatory fines, and competitive position. Rating Scale Excellent Very Good Good Adequate Poor Not Rated AKG Financial Analytics Ltd January 2018

17 Octopus Investments D F M S E C T O R ABOUT AKG AKG is an independent organisation. Originally established as an actuarial consultancy AKG has, for over 20 years, specialised in the provision of assessment, ratings, information and market assistance to the financial services industry. As the market has evolved over this period, the range of entities considered by AKG has expanded. Consequently, AKG has brought additional skill sets into its operations. This has meant the inclusion of accounting, corporate finance, IT and market intelligence experience, alongside actuarial resources, to deliver an expanded professional capability. Today AKG s core purpose is in the provision of financial analysis and review services to support the wider financial services sector and its customers. AKG Financial Analytics Ltd (AKG) 2018 This report is issued as at a certain date, and it remains AKG's current assessment with current ratings until it is superseded by a subsequently issued report or subsequently issued ratings (at which point the newly issued report or ratings should be used), or until AKG ceases to make such a report or ratings available. The report contains assessment based on available information at the date as shown on the report s cover and in its page footer. This includes prior regulatory data which may have an earlier date associated with it, but the report also takes into account all relevant events and information, available to and considered by AKG, which have occurred prior to this stated cover and footer date. Events and information subsequent to this date are not covered within it, but AKG continually monitors and reviews such events and information and where individually or in aggregate such events or information give rise to rating revision an updated report under an updated date is issued as soon as possible. All rights reserved. This report is protected by copyright. This report and the data/information contained herein is provided on a single site multi user basis. It may therefore be utilised by a number of individuals within a location. If provided in paper form this may be as part of a physical library arrangement, but copying is prohibited under copyright. If provided in electronic form, this may be by means of a shared server environment, but copying or installation onto more than one computer is prohibited under copyright. Printing from electronic form is permitted for own (single location) use only and multiple printing for onward distribution is prohibited under copyright. Further distribution and uses of the report, either in its entirety or part thereof, may be permitted by separate agreement, under licence. Please contact AKG in this regard or with any questions: akg@akg.co.uk, Tel +44 (0) AKG has made every effort to ensure the accuracy of the content of this report and to ensure that the information contained is as current as possible at the date of issue, but AKG (inclusive of its directors, officers, staff and shareholders and any affiliated third parties) cannot accept any liability to any party in respect of, or resulting from, errors or omissions. AKG information, comments and opinion, as expressed in the form of its analysis and ratings, do not establish or seek to establish suitability in any individual regard and AKG does not provide, explicitly or implicitly, through this report and its content, or any other assessment, rating or commentary, any form of investment advice or fiduciary service. AKG Financial Analytics Ltd January 2018

18 AKG Financial Analytics Ltd Anderton House, 92 South Street, Dorking, Surrey RH4 2EW Tel: +44 (0) Web: AKG Financial Analytics Ltd 2018