OM Asset Business Review 2016
2 Business review Institutional Asset Peter Bain Chief Executive Officer OM Asset (OMAM) We are an institutionally driven, active investment management business delivered through a diversified, multi-boutique framework that seeks to generate consistent, sustainable and meaningful outperformance for clients Institutional Asset business review Old Mutual s Institutional Asset business consists of US-based multi-boutique asset manager OMAM, and Rogge.* Our strategy We are an institutionally driven, active investment management business delivered through a diversified, multi-boutique framework that seeks to generate consistent, sustainable and meaningful outperformance for clients around the globe. We provide strategic capabilities to our Affiliates, helping them to become their clients trusted partners by delivering superior investment performance, innovative offerings and focused service. Our strategy is to generate business growth in two ways. The primary mechanism is through the internal development of our Affiliates, working in partnership with them to enhance their product offerings and expanding their global distribution capabilities. Our secondary source of growth is through accretive investments in additional sizeable and high-quality boutique firms. www.omam.com * Old Mutual completed the sale of Rogge on 31 May 2016.
3 Business review Institutional Asset How our business works We offer a broad range of investment strategies to clients around the globe through eight highly-regarded boutique asset management firms located across the United States: Acadian Asset Barrow, Hanley, Mewhinney & Strauss Campbell Global Copper Rock Capital Partners Heitman Investment Counselors of Maryland Landmark Partners TSW Our business is diversified, both among our Affiliates and within their respective businesses. The breadth of our product offerings by asset class, geography and investment strategy enhances our relative earnings stability and provides us with multiple potential sources of growth. Collectively, our Affiliates offer 120 distinct, active investment strategies in US, global, international and emerging markets equities; US fixed income; and alternative products including real estate, timber and secondary private equity, real estate and real asset investments. In addition, there is significant diversification within many of our Affiliate firms through the breadth of their respective investment capabilities. Through our Affiliates we serve a highly diverse investor base in the institutional and sub-advisory channels in the US and around the world. In addition to a strong US client base, our Affiliates manage assets for clients in 30 other countries including Australia, Canada, Ireland, Japan, the Netherlands, South Africa, South Korea, Switzerland and the UK. The breadth of our product offerings by asset class, geography and investment strategy enhances our relative earnings stability Our market environment The asset management industry is highly competitive; OMAM Affiliates seek to differentiate themselves through their ability to generate alpha and provide superior service to their clients. Through our collaborative organic growth initiatives, we work closely with Affiliates to enhance their product offerings to meet institutional investors evolving needs and demands. Our global distribution platform complements our Affiliates existing distribution capabilities to expand their client base globally. We seek to offer strong-performing products across a range of investment styles and strategies. We work closely with Affiliates to identify areas of growing investor appeal and to develop new investment products to address client needs: US equities with strong long-term performance across a range of equity strategies, OMAM Affiliates are well positioned to compete for new mandates Non-US and global equities investors asset allocations are shifting towards non-us and global mandates offered by OMAM Affiliates, including emerging markets and small-cap equities Alternative investments OMAM s Affiliates are among the world s leading investors in specialised asset classes such as real estate and timber, as well as secondary private equity, real estate and real asset investments After a volatile first half of the year, driven in part by Brexit and uncertainty related to the US presidential election, resilient equity markets delivered strong performance in 2016. The S&P 500 finished the year up 9.5% and the Dow Jones Industrial Average was up 13.4%. While non-us developed markets were generally flat, growing 1% in 2016, emerging markets generated significant returns, as the MSCI Emerging Markets index increased by 8.6%. Key factors in global equities at the end of 2016 and heading into 2017 were a strong shift in the broader market away from yield securities toward financials and value equities. Current institutional search activity favours specialised strategies in asset classes such as global equity, US equity and alternatives. Investors remain focused on products with potential for meaningful outperformance, as well as strategies to diversify their investment portfolios.
4 Business review Institutional Asset How we operate Our aligned partnership model is grounded in our Affiliates permanent equity ownership in their respective businesses, combined with a profit-sharing relationship with OMAM. These elements provide us and our Affiliates with strong incentives to work together to enhance the growth and stability of their firms. OMAM protects Affiliates operating autonomy and serves as a long-term partner in the further development and expansion of their businesses. Our strategy is rooted in core Affiliate growth. Our Affiliates are strong investment management boutiques with highly-defined and highly-rigorous investment strategies for which there is Growth strategy OMAM s multi-boutique model is well positioned for growth, with four areas of focus Four key growth areas New partnerships Global distribution Collaborative organic growth (Growth and Seed/ Co-Investment Capital) Unique partnership approach provides stability and foundation for growth real demand in the institutional investment marketplace. They have excellent long-term investment performance records in many strategies and are recognised for superior client service. We seek to enhance Affiliate growth through collaborative organic growth initiatives which engage Affiliates in generating new product development ideas, strategic extensions and diversification initiatives. These initiatives enable Affiliates to generate growth they would otherwise be unable to achieve. We invest alongside Affiliates in their business development and, through our profit sharing structure, participate in their resulting margin expansion and accelerated growth. Core Affiliate Growth (Investment Performance and Net Client Cash Flows) OMAM s aligned partnership model Operating autonomy Long-term perspective Profit-sharing model Affiliate-level employee ownership Talent management Strategic business support Multi-boutique value proposition drives incremental growth opportunities In addition, we have taken a strategic approach to distribution opportunities on behalf of our Affiliates. Our global distribution platform extends our franchise globally through a team of dedicated, investment-centric sales and marketing professionals. This team works with Affiliates in a transparent, non-competitive, non-redundant manner to complement existing Affiliate distribution capabilities by focusing on areas where scale is a distinct advantage, such as international markets and the domestic sub-advisory space. Since its inception in 2012, the global distribution platform has raised $13 billion for OMAM Affiliates and continues to build relationships in high-demand markets across the globe. The final element of our growth strategy, acquisitions of additional asset management boutiques, provides an incremental earnings growth opportunity as well as additional diversification in investment styles, product offerings, and institutional clienteles. OMAM is recognised as a supportive and effective partner to our Affiliates and we continue to cultivate relationships with a wide range of high-quality, entrepreneurial boutique asset management firms committed to the growth of their businesses. Since 2012, the execution of our growth strategy has contributed meaningfully to an increase in gross sales at OMAM. On an annual basis, between 16% and 33% of gross sales can be directly traced to OMAM-led activities including new initiatives, product seeding, global distribution and sales from new Affiliates acquired by OMAM. We support our growth strategy through a flexible and efficient capital structure and a focus on strategically managing our capital. Our business generates significant, recurring free cash flow that can be reinvested in growth-oriented activities to create value for shareholders. In addition to allocating capital to enhance our existing Affiliates businesses and investing in new Affiliates, we currently maintain a 25% payout ratio and an opportunistic share repurchase programme.
5 Being responsible Our commitment to leadership in responsible business stems from our Affiliates focus on performing their duties to their clients, which is to ensure that they provide their clients with the consistent execution of their stated investment strategies and the highest level of client service. Our approach to responsible business is based on a five-pillar framework: Responsible to our clients Responsible investment Responsible to our employees Responsible to our communities Responsible environmental management This approach emphasises that our clients are at the heart of our business, and will help us to continue building on the strong foundation of ethical values, treating clients fairly and good governance that is critical to the management of our clients money. We continue to work with our Affiliates to consider alternatives and build responsible investment into their investment approach in a way that is consistent with their investment processes and the needs of their clients. Measuring our performance OMAM had a strong finish to 2016, notwithstanding a challenging equity market environment in H1. AOP of $195.0 million was down 15% compared to 2015, in part due to the impact of exceptional performance fees in the prior year; excluding the impact of these fees, pre-tax AOP was down 7%. IFRS profit after tax attributable to equity holders of the parent increased by 9% to 72 million (2015: 66 million). OMAM s FUM ended the period at $240.4 billion, up $28.0 billion, or 13%, from 2015 (31 December 2015: $212.4 billion) due to improving markets in H2 2016 and the acquisition of Landmark Partners ($8.8 billion) in Q3. While NCCF for the year were $(1.6) billion, a favourable product mix shift resulted in positive annualised revenue flow of $11.0 million, representing 1.5% of beginning of period run rate management fee revenue, with inflows in higher fee non-us, emerging markets, and alternative products offsetting losses in lower fee US sub-advisory assets. OMAM Affiliates maintained their competitive investment performance in 2016. While OMAM s value-oriented strategies faced headwinds through much of the year, Affiliates continued to generate long-term track records of relative outperformance. OMAM s aggregate investment performance is reported as OMAM had a strong finish to 2016, including positive annualised revenue flow of $11.0 million, representing 1.5% of beginning of period run rate management fee revenue AUM BY STRATEGY ($BN) 4 1 3 Highlights $m 2016 2015 Change IFRS profit after tax attributable to equity holders of the parent ( m) 1 72 66 9% AOP (pre-tax) 195 229 (15%) Operating margin, before Affiliate key employee distributions 36% 38% Operating margin, after Affiliate key employee distributions and before interest expense 30% 33% NCCF ($bn) (1.6) (5.1) FUM ($bn) 240.4 212.4 13% 1 Institutional Asset, including Rogge. 2 1. Total global/non-us equities $96.4bn 2. Total US equity $82.0bn 3. Alternatives $48.1bn 4. Fixed income $13.9bn
6 Business review Institutional Asset weighted by the revenue generated by its products. As of 31 December 2016, assets representing 49%, 55% and 73% of revenue were outperforming benchmarks on a one-, three- and five-year basis, respectively. Strategic priorities and outlook We seek to grow our business through core Affiliate growth, as well as investing in collaborative organic growth initiatives, enhancing distribution capabilities and partnering with new Affiliates. Our journey so far OMAM launched its initial public offering in 2014 on the New York Stock Exchange. The business has performed well since then, achieving solid margins relative to peers as well as revenue growth from new client cash flows into higher-fee products. We have generated meaningful asset growth from collaborative organic growth initiatives in partnership with Affiliates and the successful expansion of our global distribution platform. We have also cultivated a wide range of relationships with boutique asset management firms, and are recognised as an attractive long-term partner. Our priorities achieved in 2016 The volatile market environment in 2016 presented challenges across the asset management industry. However, our business model positions us to withstand such market cycles, as our profit share arrangement with our Affiliates provides a high level of structural variability to expenses. Our Affiliates maintained their long-term investment disciplines over this period. We also saw growth from positive revenue flows combined with a strong market in the second half of the year. 2016 represented our fifth consecutive year generating positive revenue flows. We will continue to generate core Affiliate growth, invest in collaborative organic growth initiatives, increase global distribution opportunities and execute new Affiliate partnerships In 2016 we acquired an equity interest in Landmark Partners, a widely recognised, highly regarded manager of secondary private equity, real estate and real asset investments. This acquisition provides meaningful exposure to an attractive, growing segment of the asset management industry. It generates additional financial and strategic diversification for the OMAM franchise and was immediately accretive to our earnings. To fund the Landmark acquisition and support other corporate obligations, we raised $400 million of debt in 2016. Our leverage ratio of 1.9x debt/ebitda at year-end 2016 remains within our target range of 1.75-2.25x debt/ebitda. We retain ample funding capacity, with approximately $350 million available on our five-year credit facility, which expires in 2019. Our priorities going forward We will continue to execute our growth strategy: generating core Affiliate growth through strong investment performance and positive revenue flows; investing in collaborative organic growth initiatives with existing Affiliates; increasing global distribution opportunities for Affiliates; executing new Affiliate partnerships; and efficiently managing our balance sheet. Over the medium term, we and our Affiliates are focused on developing capabilities in multi-asset class, liability-driven investment and global/ non-us equities and further penetration of specialised and non-us markets through our global distribution initiative. In addition, we continue to make good progress in identifying and developing relationships with at-scale asset management boutiques with strong investment and executive talent and a vision to enhance and expand their business by partnering with us.
7 Managing our risk OMAM s risk strategy is intended to provide a strong link between our business strategy and our day-to-day operations. Our risk strategy defines how we think about our risk profile, our risk tolerances and our risk management practices. We reflect our risk strategy across all of our business activities including the development of our business plans, our execution against those plans and how we manage our relationships with our Affiliates. In summary, our risk strategy seeks to manage risk in a way that adds value to the organisation. Current impact and risk outlook 1. Affiliate relationship risk Risk mitigation and management actions Our relationships with our Affiliates are critical to our success. 2. Investment performance and market risk We seek to mitigate this risk by operating each Affiliate relationship under established ownership, governance and economic arrangements that are negotiated either at inception or over the course of our relationship. The ability of our Affiliates to attract and retain FUM and generate earnings is dependent on our Affiliates maintaining competitive investment performance, as well as market and other factors. 3. Revenue concentration risk We derive our revenue from a definitive number of Affiliates and investment strategies. 4. People risk We and our Affiliates rely on certain key personnel, and our results are dependent upon our ability to retain and attract key personnel. We seek to mitigate this risk through careful monitoring of economic conditions and market trends as well as the performance of specific Affiliate investment strategies. We seek to mitigate this risk through product development and diversification initiatives within individual Affiliates as well as through the execution of our growth strategy whereby we seek to invest in new Affiliate partnerships that can provide further diversification of our revenue streams in some way such as by Affiliate, investment strategy, client geography, asset class, etc. We seek to attract, retain, and motivate key personnel by maintaining a strong and healthy culture as well as market-competitive compensation arrangements that include, where appropriate, retentive elements that are designed to align OMAM/Affiliate and employee interests over time.
8 Business review Institutional Asset www.oldmutualplc.com/rb/our-stories Partnering with the Posse Foundation Founded in 1989, Posse identifies public high school students with extraordinary academic and leadership potential who may be overlooked by traditional college selection processes. Posse extends to these students the opportunity to pursue personal and academic excellence by placing them in supportive, multicultural teams Posses of 10 students. Posse s partner colleges and universities award scholars four-year, full-tuition leadership scholarships. Posse s national program has awarded $1.1 billion in leadership scholarships to these young people and has seen their success in their graduation rates and as leaders on campus. Posse s partners are investing time, energy and resources in the promotion of equity in education and social justice. They believe in the intelligence, talent and dreams of young people and are giving them a chance to excel. Posse is helping to create a new kind of network of leaders who will sit at the tables where decisions are made and better represent the voices of all Americans. With support from the program, Posse s scholars are excelling academically, founding and leading campus organisations, taking on competitive internships and earning prestigious awards. Posse s equally successful alumni secure competitive jobs and admission to top graduate programs. Since 2009, OMAM has supported Posse financially, through direct employee engagement, and by hiring Posse s scholars as interns every summer in various areas of the OMAM business. OMAM supports the Posse Foundation in its efforts to give young people a chance to excel
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Registered in England and Wales No. 3591559 and as an external company in each of South Africa (No. 1999/004855/10), Malawi (No. 5282), Namibia (No. F/3591559) and Zimbabwe (No. E1/99) Registered Office: 5th Floor Millennium Bridge House 2 Lambeth Hill London EC4V 4GG www.oldmutualplc.com