HGG.L Regulatory News (HGG)

FULL YEAR RESULTS 2013

26 February 2014

Notes

1. The results for 2012 have been restated upon the adoption of the amended standard IAS 19 Employee Benefits. See notes 2 and 34 of the consolidated financial statements for further details.

2. Net fee income less operating expenses, divided by net fee income, all from continuing operations.

3. Based on total AUM. Continuing AUM represents £63.7bn as at 31 December 2013.

4. Based on total underlying profit after tax attributable to equity holders of the parent.

5. Based on weighted average number of shares in issue less weighted average number of own shares held during the year.

6. Based on weighted average number of shares in issue less weighted average number of own shares held during the year adjusted for the dilutive potential of share awards and share options.

7. FY13 consists of 1H13 interim dividend of 2.15 pence per share and proposed final dividend for 2H13 of 5.85 pence per share.

Commenting on the 2013 full year results Chief Executive, Andrew Formica said:

"I am very pleased to announce record profits for Henderson in 2013. We have further improved our investment performance and delivered strong returns for our clients across all of our core capabilities.

Our consistently strong investment performance and market positioning have enabled a turnaround in our retail business and a return to strong positive net inflows, with a retail net inflow of £2.5bn in the fourth quarter, up from £1.3bn in the third quarter. The financial strength of our business also continued to improve, allowing us to increase the total dividend by 12% over the prior year.

Given all we achieved in 2013, continued strong flows so far in 2014 and the way we have positioned ourselves for growth, I am confident about the outlook for our business."

Henderson Group plc47 EsplanadeSt HelierJersey JE1 0BDRegistered in JerseyCompany No. 101484ABN 67 133 992 766

2013 full year results

Key financial highlights

· Record underlying profit before tax and diluted underlying EPS from total operations of £190.1m and 14.9p respectively

· Operating margin improved to 35.7%

· Strong investment performance over three years; 82% of funds are outperforming

· Positive net flows of £2.5bn for the year

· AUM increased to £75.2bn at 31 December 2013

· Board recommending a 12% increase in total dividend with final dividend set at 5.85 pence per share

Financial results

Note

1. The results for 2012 have been restated upon the adoption of the amended standard IAS 19 Employee Benefits. See notes 2 and 34 of the consolidated financial statements for further details.

AUM and flows

Note

1. Certain categorisations and cross-holding adjustments have been made following the implementation of a new AUM system in December 2013. In addition, this includes £199m of AUM acquired as a result of the Group's acquisition of H3 Global Advisors in November 2013 and the Group's share of 90 West AUM acquired in April 2013.

Forward-looking statements

This announcement contains forward-looking statements with respect to the financial condition, results and business of the Group. By their nature, forward-looking statements involve risk and uncertainty because they relate to events, and depend on circumstances, that will occur in future. The Group's actual future results may differ materially from the results expressed or implied in these forward-looking statements. Nothing in this announcement should be construed as a profit forecast.

To view the full details of the 2013 Full Year Results (ASX Appendix 4E), paste the following link into your web browser:

http://www.rns-pdf.londonstockexchange.com/rns/9350A_-2014-2-25.pdf 

To view the full details of the 2013 Full Year Results Presentation, paste the following link into your web browser:

 http://www.rns-pdf.londonstockexchange.com/rns/9350A_1-2014-2-25.pdf

Market briefing

Management will present these results on 26 February 2014 at 8:00pm (Sydney time)/9:00am (London time).

Teleconference details

We recommend participants start dialling in 5 to 10 minutes prior to the start of the presentation. To link-up to the briefing, dial one of the following numbers from 7:50pm (Sydney time)/8:50am (London time):

Webcast details

You can logon to a webcast of the results briefing which will start at 8:00pm (Sydney time)/9:00am (London time). Go towww.henderson.com/group and click on the relevant link on the homepage. An archive of the webcast will be available shortlyafter the event.

Further information

www.henderson.com

or

Preliminary final report

for the Year Ended 31 December 2013

Incorporating the requirements of ASX Appendix 4E

The information contained in this document should be read in conjunction with the Henderson Group plc (the Company) Annual Report for the year ended 31 December 2013 and any public announcements made by the Group in accordance with the continuous disclosure obligations arising under the Corporations Act 2001, the Companies (Jersey) Law 1991 and the Australian Securities Exchange (ASX) Listing Rules. This report includes the full year information required to be given to the ASX under Listing Rule 4.3A.

Results for announcement to the market

The results of Henderson Group plc for announcement to the market are as follows:

Notes

1. Revenue from continuing operations. 2012 restated due to change in accounting of initial commissions. See notes 2 and 34 of the consolidated financial statements for further details.

2. Excluding non-controlling interests profit of £nil (FY12: £0.2m profit).

Dividends

On 25 February 2014, the Directors recommended the payment of a final dividend in respect of the year ended 31 December 2013 of 5.85 pence per share.

Henderson Group plc does not offer a dividend reinvestment plan.

Net tangible assets per ordinary share

Net tangible assets are defined by the ASX as being total assets less intangible assets less total liabilities ranking ahead of, or equally with, claims of ordinary shares.

Five year financial summary

1. The results of prior periods have been restated upon the adoption of the amended standard IAS 19 Employee Benefits. See notes 2.3 and 34 of the financial statements for further details. Prior periods have also been restated to reflect continuing and discontinued operations of the Group - see note 9 of the financial statements for further details.

2. Net fee income from continuing operations less operating expenses from continuing operations divided by net fee income from continuing operations.

3. Employee compensation and benefits from continuing operations divided by net income from continuing operations excluding income from associates and joint ventures.

4. Net margin calculated on underlying profit before tax from continuing operations.

5. Based on underlying profit after tax attributable to equity holders of the parent.

6. Asset weighted of funds measured over one and three years to 31 December 2013. 2013 includes Henderson UK Property Unit Trust - all prior periods include Property and Henderson UK Property Unit Trust performance.

Business review

Chief Executive's review

£2.5bn

Total net inflows

72.8%

Increase in share price

Building a global footprint

It has now been five years since I became Chief Executive and I wanted to begin my review by looking back at what we have achieved in that time. There has been significant change and I believe Henderson is now a much stronger business with a very exciting future following the decisions and investments we have made.

When I became Chief Executive, we were at the beginning of what quickly became the global financial crisis - the repercussions of which are still felt worldwide. It was clear to the Board and to me that Henderson was going to have to be very nimble to survive the worst of the ensuing storm. Despite having built a presence in the US and Asia - markets we now consider core to our long-term growth plans - our home markets of the UK and Europe were not delivering on the high expectations we had set for ourselves. Without a solid base, it would have been unwise to invest further afield. It was also apparent that Henderson no longer enjoyed the strong retail presence and powerful brand it once did. In light of these challenges - a core business not performing as it should have been and hugely difficult market conditions - the Board and I made the strategic decision to capitalise on the opportunities that materialised to strengthen our core position. We set about rebalancing the business back towards retail and improving not only the financial health of the Group but also strengthening the focus on our clients and especially delivering investment performance. The results of this decision were the highly effective acquisitions of New Star and Gartmore. Both acquisitions were not only financially compelling transactions for us, they also brought some remarkably talented colleagues into our business and we are proud to work side-by-side with them today as part of one team.

The changes have not been limited to UK acquisitions. We have significantly enhanced our global distribution network and built our international business both organically and by selective bolt-on acquisitions. We have also simplified our structure to better focus on our core capabilities of European Equities, Global Equities, Global Fixed Income, Multi-Asset and Alternatives.

Henderson is now a strong business, with a trusted brand and a suite of highly popular flagship funds which are attracting significant new flows, combined with consistently good investment performance and an unrelenting focus on clients and shareholder value.

The results we have reported for this year are a clear sign that the changes we have made are bearing fruit.

Strong investment performance and positive flows

We have always prided ourselves on our investment performance and I am pleased that performance further strengthened across our core capabilities over one and three years. Our three year investment performance has improved so that 82% of our funds are at or exceed their performance benchmarks. On a one year basis, it is also strong at 78%. Comparatively, in 2012 73% and 69% of our funds were at or exceeded their benchmarks over one and three years, respectively.

I am also delighted to report a return to positive net inflows from our clients. This was driven by our retail fund ranges, which saw a combined £4.4bn of net inflows for the year across geographies. Importantly, we saw a return to positive UK retail net flows, a core strategic objective of the earlier acquisitions.

Our institutional business, which now makes up less than half of our total AUM, has started to stabilise. Outflows of £1.9bn during the year were driven by a former Gartmore client redeeming following historical poor performance and some other clients rebalancing away due to realising returns following strong investment performance. Despite these net outflows over the year, I am pleased with the improving trend in the second half and we are encouraged by the outlook for this part of the business.

A record set of results

The strong investment performance and fund flows are beginning to have a positive impact on our financial results. We have achieved all-time highs on a number of levels, including on a continuing basis, profit before tax, earnings and dividends per share. Continuing underlying profit before tax (which excludes the business subject to the TIAA Henderson Real Estate transaction described below) of £165.5m is up 31% on last year, helped by performance fees of £94.5m. The improvement in profitability contributed to an increase in continuing diluted underlying EPS to 13.0p, up 26% compared to last year.

Finally, assets under management on a continuing basis has increased to £63.7bn as at 31 December 2013, an 18% increase on last year.

This is a very strong performance and is testimony to our continued focus on delivering excellent investment performance and service for our clients. I am very pleased with the sustained strength of our investment performance achieved.

TIAA Henderson Real Estate

A significant activity for us last year was the decision to separate our non-US Property business into a standalone business, via the sale of 60% of this business to US-based TIAA-CREF to create TIAA Henderson Real Estate.

This transaction will accelerate the growth of our Property business by creating a new company of genuine global scale with a deep source of additional capital. It will further strengthen our balance sheet and provides us with a powerful new partner in TIAA-CREF. This relationship will be enhanced by the sale of our US Property business to them. It will also enable us to focus our efforts around our core investment management businesses.

Building a global footprint

With our home markets of the UK and Europe returning to growth, and with our acquisitions well and truly bedded down, our focus is now shifting towards the development of our international business. Over 2013, we have significantly enhanced our global distribution network and built out our international footprint, both organically and by selective bolt-on acquisitions. This included expanding our absolute return product range with the acquisition of a 50% interest in Northern Pines Capital, a US long/short equity fund manager, at the beginning of 2013; hiring a specialist US credit team; and the establishment of our Australian business. Our Australian business is now growing quickly as we acquired H3 Global Advisors, a specialist commodity manager, and 33% of 90 West, a natural resources equity specialist boutique, both in 2013. In December, we launched our first Henderson-branded fund, a Global Equities fund.

As we look forward to the next five years, you should expect to see us continue our investments into our international markets as we make sure Henderson is positioned as a truly global asset manager.

Our brand

Our new global brand marks an important milestone in the evolution of Henderson. Much has changed from the early days when the company was founded in the early 20th century to serve our first client, Alexander Henderson. Today, we are a modern, global investment house, yet we still hold true to our founding principle - to provide excellent performance and service to our clients.

As we have implemented our globalisation strategy, our business has evolved significantly. We have enjoyed strong sales in the UK, Continental Europe and North America and have continued to broaden our global distribution footprint.

To build upon this significant momentum, and to widen the appeal of Henderson's brand to sophisticated investors around the world, we have launched a new visual branding campaign that presents Henderson as a modern, global asset manager with its own distinctive identity and values. We believe that this identity better reflects our global reach and better conveys the trust, quality and service we promise our clients.

2014 is an exciting year in the evolution of Henderson as we approach our 80th anniversary. To meet the needs of an increasingly demanding and sophisticated global client base, we will continue to build our brand positioning - Knowledge. Shared.

Board and executive changes

In May, Rupert Pennant-Rea retired from the Board and stood down as Chairman after nine years with the business. Henderson has benefitted greatly from Rupert's Chairmanship and he served our Board with distinction. I was delighted Richard Gillingwater agreed to step into Rupert's large shoes. Already in a short time, he has made a considerable impact on the Group and I know under his stewardship Henderson will flourish as it sets out on the next phase of its growth.

Shirley Garrood also retired after more than 12 years with the business, the last four as our Chief Financial Officer. She helped me steer Henderson through the financial crisis and oversaw strict cost discipline in the business. I am delighted to welcome Roger Thompson as her replacement. Roger joined us from J.P. Morgan Asset Management where he had 19 years' experience working in a truly global business. We will be joined shortly by Rob Gambi who returns to Henderson from UBS Global Asset Management to take up the reins as our Chief Investment Officer.

Whilst sad to see some long-standing and highly talented colleagues move on, I am excited about the new management team and structure that we now have in place. I believe that they are exactly the right team to lead us in Henderson's next phase.

Investment 2020

Finally, I wanted to share my pride in seeing a project, in which Henderson has played a leading role and one which is very close to my heart, expand this year.

Investment 2020 is a collaborative initiative launched in March 2013 by 12 asset management businesses in the City of London to provide trainee programmes for young adults looking to join the fund management industry. It is a successful spin-off of Henderson's Trainee Scheme that began in 2010 and offers individuals with strong potential a chance to develop their skills via both formal and on-the-job training.

It is my strong belief that the best fund managers and the best people are not always drawn from the same backgrounds; rather, our industry succeeds and grows through the rich diversity of the people who work within it. Investment 2020 gives school leavers and graduates from all backgrounds the opportunity to work for 12 months at a participating company, including Henderson, learning the industry from the inside.

The shared goal is to create 2,020 new entry level opportunities by the year 2020. Our trainee schemes take on approximately 35 people each year and have had a strong retention rate at the end of each programme to date.

I am delighted that other fund managers in London are taking our lead and introducing similar programmes as part of Investment 2020. As a leading investment management company, we believe it is vital that Henderson not only considers our clients and shareholders but that we also take into account how our actions impact upon our society at large - and we take our responsibilities in this area seriously.

Summary

Our mission remains to be a trusted global asset manager focused on delivering excellent investment performance and service to our clients. The last 12 months have seen us take great strides forward on delivering against our mission. In the years ahead, we will continue to invest in the business and maintain focus on our clients as we seek to build upon the solid foundations of our business.

I would like to thank our shareholders for their patience and support over the years. To my colleagues here at Henderson, I would also like to extend a very large thank you for their unflagging commitment, working tirelessly on behalf of our clients to enable Henderson to deliver on our promises.

Andrew Formica

Chief Executive

Distribution and client services

Global distribution and service

Clients

At Henderson, we have a grand passion: our clients' needs and expectations. The culture of client centricity sits at the heart of how we think and the decisions we make. We have invested heavily in processes that are designed to improve the client experience at Henderson. Whether this is in training our people, continuing to embed the principles of Treating Customers Fairly into Henderson's culture or actively seeking the views of our existing and potential investors and their underlying clients, we see client satisfaction as the key pillar on which we judge our success.

In an increasingly complex world of aggregators, advisers, platforms and nominees, we are very aware that many of our funds and strategies are being bought for a globally-based audience, whether to enhance their income, for their savings or for their pre- or post-retirement needs. During 2014, we will continue to develop our research and feedback structures to ensure we have the best possible information on which to base our decisions about which products to launch and whether our existing products are meeting the needs of these investors.

Brand

Our business strategy is centred on our clients, with us serving both retail investors and institutions and with our international business as a key driver of growth. Henderson's existing visual brand identity was developed after the acquisition of New Star in 2009 and Gartmore in 2011, and was a retail-led brand with a strong UK focus. We now have a clear strategy to grow our global distribution capabilities and showcase the business as a high quality asset manager offering excellent products and services to a global audience.

Whilst our logo and visual identity have been enhanced to better reflect our business, an asset management brand is much more than that. It is about our beliefs and behaviours, and captures the essence of how we treat our clients, the products we offer them and the way we service them. We believe that the new brand will enable our investors and clients to better associate and identify with Henderson.

Distribution trends and flows

A number of key themes have driven the significant net new money flows during 2013, and we believe that these themes have a number of years to run. As ever, the main driver of new business flows remains the quality of our core product offering: that is, risk-adjusted returns and the quality of our investment processes. A very strong period of investment performance has resulted in significant inflows not only across our business globally but also across a wide range of strategies.

The key themes we have observed are:

Search for income

With low returns on cash savings combined with demographic trends, there is increasing demand for income generating products, whether in the form of corporate bond funds or equity income products.

Global Equity Income was one of our highest selling asset classes in 2013, and this is one of the capabilities where Henderson has a long and distinguished history in both open-ended funds and investment trusts. We have seen significant demand for our Global Equity Income strategies in 2013 and are therefore planning to launch new products in early 2014 in other geographic regions to take advantage of this demand. This includes a new Global Equity Income fund for European and Asian investors to enable them to benefit from our team's strong performance.

Our strong Fixed Income team is also well placed to take advantage of the increasing demand for income generating products. In 2013, we launched our US High Yield Bond Fund for US investors and our Global High Yield Bond Fund for European and Asian investors. This, combined with our well-established Fixed Income range in the UK, gives our investors plenty of options to generate higher income.

Globalisation

Increasingly, investors, whether retail or institutional, are looking at the global marketplace when searching for the best returns rather than being constrained by their domestic market. This is manifesting itself in demand for global strategies such as Global Equity Income, Global Equity, Global Credit and Global High Yield. This is an area of substantial opportunity for Henderson and where we have been investing heavily to build our capabilities. For example, in 2012 we brought in a new Head of Global Equities and in 2013 we added a High Yield Credit team in the US to complement our already very strong European Credit team. This combined team launched a new strategy in 2013, the Global High Yield Fund. 2013 also saw a reduction in allocations to global emerging markets, but we believe this is a temporary phenomenon and as such we are using this opportunity to combine our Global Equities teams and our Global Emerging Markets teams to leverage the strong performance of the former across more strategies.

Absolute return

There is very significant demand globally for absolute return products - that is, products that are designed to have low correlations to equity markets and have lower volatility, whilst still aiming to produce positive market returns through the investment cycle. Again, low returns on cash and bonds are driving demand for higher returns without full equity market risk. We are able to take advantage of this through both our onshore and offshore fund ranges and have a mix of strategies, from equity long/short products to alternatives such as agriculture and commodities. We have been investing in this area, adding new teams through acquisitions to broaden our product set, and we will be launching more products from these teams in 2014.

Changes to the regulation in the marketing of hedge funds in Europe have left us well placed relative to the competition. As a large pure play asset manager, we have the product set and fund structures to enable European investors to access many of our absolute return strategies through regulated funds.

Given these changes it is likely that one of the larger sources of demand for our offshore fund structure will be the US, and in 2014 we will be adding additional resources to the distribution team to market the increasing number of strategies we have in that stable. All of this of course will be brought to market under the strong sub-brand we have for our hedge fund business, Henderson AlphaGen. This is a brand well recognised as having a strong pedigree of consistent risk-adjusted returns.

Institutionalisation of the fund buying process

One of the main changes resulting from the Retail Distribution Review in the UK and the growing profile of private banking across the globe, is that the process of fund selection in the retail marketplace is now much more rigorous and akin to the institutional selection process. This means a great deal of in-depth research by fund panels and investment committees the world over. This fits well with Henderson's approach, as all of our investment strategies have stringent processes behind them with an overlay of an extremely strong risk management framework suited to this type of buyer.

Concentration of fund flows

As a consequence of the above, combined with a flight to the safety and security perceived to be offered by bigger brands and funds, there has been an increasing amount of flow into fewer funds. This has resulted in a number of groups, including Henderson, to limit flows into certain funds to protect the interests of existing investors. For example, we have imposed a 'soft close' policy on our European small cap funds and our credit alpha strategy. This enables us to limit the size of the funds, continue to provide excellent investment returns and ensure we manage liquidity for our existing investors.

Multi-Asset investing

A key theme in the UK and an increasing trend globally is the desire to outsource a combination of asset allocation and stock or fund selection. This has given rise to larger inflows into investment solutions strategies, and Henderson has been at the forefront of this trend using the skills of our Multi-Asset team. We are increasing the strength in this area by adding further resources and additional strategies, particularly focusing on risk targeting for clients. In the institutional area, we see this as a significant opportunity for us, given the quality and strength of our team. Again, we believe we can leverage the strong performance of this team across various channels moving into 2014.

European equities opportunities

The second half of 2013 showed a marked increase in the global demand for European equities. Investors worldwide, including Europe, had been significantly underweight in European equities due to their negative view on the region with its well documented macro issues. With increasing demand for developed market equities in 2013 and the relative valuation of European companies compared to US companies, investors have begun to realise the opportunity.

This has clearly played to our advantage this year as we have one of the strongest European Equities teams in the world, with strong performance across all strategies, including large cap, value, blend, growth, mid and small cap. We have enjoyed very strong flows into European equities from the UK, Europe, Latin America and the US in 2013. We see this trend developing into 2014 with a strong pipeline of opportunities for us to attract global clients into this asset class.

Demand for specialist fixed income

There has been much speculation in the last year or so about the end of the bull market in bonds and, linked to that, talk of a "great rotation" from bonds into equities. In our experience, whilst there has been some rotation we are still at the very early stages of this trend. In the first instance, we would observe that there has been an "inner rotation" within fixed income, where investors shifted away from pure vanilla gilts and bond funds into more specialist forms of fixed income in search for outperformance.

Given the strength of our Fixed Income team, these trends leave us well placed as we have observed increasing demand from existing and new institutional clients for high alpha, absolute return and total return bond funds, together with demand for alternative forms of fixed income assets such as multi-asset credit, which includes loans and asset-backed securities.

2014 and beyond

As we move into 2014, we continue to develop our distribution strategy in line with the Group's mission to become more global and focused on excellent investment performance and client service.

Diversification is a powerful driver of value in asset management and our strategy is to diversify by asset type, strategy, geography and client. This includes, as previously mentioned, launching a range of new products for our US, European and Asian clients. In addition, in Australia, we are continuing to build our distribution strength and are launching a new retail fund range. 2013 saw us make significant changes to the structure and people in retail distribution globally and we are reaping the rewards from these changes.

Our UK institutional business has had a very strong year but is primarily based on Fixed Income. Given the strength of our Multi-Asset and Equities performance, we believe we have an opportunity in this market to reinforce our credentials and secure new flows into other strategies, in particular into Diversified Growth, which is run by our Multi-Asset team.

However, in other areas of our institutional business, we saw outflows. This included one former Gartmore client in particular that withdrew £840m in the first quarter, having suffered a sustained period of poor performance prior to the transfer to Henderson.

In Europe, the US and Asia, our institutional businesses are small but are beginning to grow. In particular, as our new global products develop their track records, we will introduce these to new and existing consultants, advisers and clients. In 2014, we expect that we will see further changes and investments in our distribution reach in the institutional space, in line with the developing track records of our strategies.

Henderson is well placed to continue to grow and develop as a strong independent fund manager focusing on delivering to its clients. We believe that we have attracted and built one of the strongest client service functions in the industry with experienced, like-minded, respected and highly regarded industry leaders in our team. Most importantly though, they share the common goal and belief that looking after our clients' needs is our number one priority.

Financial review

Generating strong performance

Financial performance

I am pleased to present my first set of full year financial results since I joined Henderson in June 2013. The Group achieved a record total underlying profit before tax of £190.1m, an increase of 24% on 2012. As a result of the TIAA-CREF transactions (detailed below), the Group has split its total underlying profits between continuing and discontinued operations, as we regarded our property activities as a major line of business. Continuing underlying profit which excludes the businesses subject to the TIAA-CREF transactions is a fair and appropriate measure of how the ongoing business of Henderson is performing. In 2013, continuing underlying profit before tax rose by 31% to £165.5m primarily driven by an increase in management and performance fees, partly offset by an increase in variable staff costs. The Group's key performance indicators show the business has performed well, generating strong net retail fund flows, especially in the second half of 2013, continued strong investment performance, record performance fees and a strong set of financial results. All these factors have contributed to the increase in variable staff compensation and therefore, a higher but appropriate compensation ratio given the outlook for the business.

The Group continued to demonstrate cost control which, combined with the impact of the restructuring exercise completed at the end of 2012, resulting in fixed staff costs decreasing 3%. The resultant operating margin increased from 34.1% to 35.7%, reflecting the improved performance of the business. Diluted continuing underlying EPS increased 2.7p to 13.0p, driven by increased profits and a lower effective tax rate.

Total income and fee margins

Management fees grew 10% to £331.9m as the impact of higher equity markets globally and strong flows into our retail products, particularly in the second half of the year, helped offset the impact of outflows in 2012. Performance fees hit a new record at £94.5m as fees earned from offshore absolute return funds, UK OEICs and SICAVs were significantly higher, driven by strong performance and improved markets. Transaction fees fell slightly by £4.3m to £34.9m due to a reduction in one off fees in 2013.

The result was that total fee margin improved by 12% to 78.2bps and management fee margin remained relatively flat at 56.3bps as any marginal fee pressure has been more than offset by flows into higher margin products.

Total operating expenses

Driven by the strong business performance, operating expenses increased by 21% to £296.7m. This was primarily driven by variable staff compensation which increased by £58.4m to £129.0m, reflecting increased performance fee bonuses, strong investment performance, improved net flows and overall business performance. Other operating expenses decreased 4% to £84.5m as a result of continued cost control, recognition of certain one off items and a favourable foreign exchange impact. Without the one off items and foreign exchange benefits, non-staff operating costs would have increased by c4%.

Finance income and expenses

Finance income decreased by £3.9m to £10.2m driven primarily by lower profits on seed capital investment realisations and a reduction of interest recognised in respect of pension scheme surpluses. Finance expenses decreased 22% to £11.1m due to the repayment of the 2012 Notes in May 2012.

Acquisition related and non-recurring items

The acquisition related and non-recurring items are disclosed separately from that of the Group's underlying profits to enable the users of our financial statements to better understand the components of our total profit. These items totalled £62.7m and mainly represent the intangible amortisation of investment management contracts. In 2013, the Group recognised £4.3m of non-recurring costs related to the TIAA-CREF transactions' deal and implementation costs. This is partly offset by a reduction in Gartmore share scheme costs as these schemes all vested in 2013.

Tax

The tax charge on the Group's total underlying profit for the year was £20.8m, resulting in an effective tax rate of 10.9%. The effective tax rate on underlying profit is less than the pro-rata UK corporation tax rate of 23.25%. This is primarily due to differences in tax rates on earnings generated overseas and the recognition of net favourable tax adjustments.

TIAA-CREF transactions

The Group announced on 24 June 2013 its intention to sell its North American Property business and contribute its European Property business to a joint venture with TIAA-CREF. As mentioned earlier, the Group's 2013 and 2012 results have been split on a continuing and discontinued basis to reflect these transactions. The table below provides the key impacts of these transactions. Following completion, the Group will recognise 40% of its AUM. The Group will continue to recognise 100% of the Henderson UK Property Unit Trust AUM.

AUM and fund flows

Total AUM at 31 December 2013 was £75.2bn, an increase of £9.6bn (c15% of opening AUM). The Group achieved net fund inflows of £2.5bn as investor confidence returned and the Group was well positioned to capture client demand due to its strong investment performance. Flows into Retail products were particularly impressive where the Group saw c15% of net new money, with £3.9bn of net inflows being generated in the second half. Institutional flows, whilst on an improving trend and positive in the fourth quarter, were disappointing with a large outflow from a legacy Gartmore client in the first half due to historical performance issues. The table below shows the Group's continuing AUM by capability as at 31 December 2013:

Investment performance

Investment performance of the Group's funds remained strong. Overall 78% and 82% of funds outperformed over one and three years respectively. This strong performance is reflected across the Group's core capabilities and is detailed below.

European Equities' performance was strong over one and three years with our Pan European Equity Fund in the top quartile over both periods. In Global Equities, our International Opportunities Fund continued to perform strongly during 2013 with both one and three year performance in the top quartile. Although disappointing over one year with third quartile performance, our Global Technology Fund performance over three years was top quartile. Within Global Fixed Income, our European Corporate Bond finished 2013 at the top of its peer group based on three year performance. Multi-Asset performance was strong over one year but slightly weaker over three years mainly due to a difficult period of performance in late 2011 and early 2012 where our Multi-Manager Income and Growth Fund performance was third quartile. Our Alternatives capability continued its excellent performance.

1. Refers to continuing capabilities only.

2. Performance is relative to benchmark, percentile ranking or absolute performance where appropriate.

3. Alternative performance excludes Private Equity performance.

Liquidity and seed capital

The Group's business continued to generate strong net operating cash flows of £174.9m during 2013.

Total cash and cash equivalents at 31 December 2013 were £231.7m including cash classified as held for sale. After excluding manager dealing accounts of £25.4m, unrestricted cash stood at £206.3m. With gross debt, at par, amounting to £150.0m, the Group ended 2013 in a net cash position of £56.3m (2012: £17.9m).

The increase in net cash was moderated as the Group took the opportunity to invest a net c£30m of seed capital into new fund launches during 2013.

Pension schemes

The Group has four pension schemes. A defined benefit scheme and a defined contribution scheme, together form the Henderson Group Pension Scheme (HGPS) and three smaller unapproved pension top-up schemes for former executives. The net retirement benefit asset decreased during 2013 to £96.5m, mainly as a result of AA corporate bond yields falling causing the present value of liabilities to rise.

As part of the Gartmore acquisition in 2011, the Group acquired the assets and liabilities of the Gartmore Pension Scheme (GPS). During 2013, as part of its arrangements with Pension Insurance Corporation (PIC), the Trustee of the GPS completed its wind-up by converting to individual member policies with PIC. As part of the wind-up, the Group recovered £6.8m (after £3.7m of withholding tax deducted) in cash representing GPS's surplus funds.

Regulatory requirements

The Group is subject to regulatory oversight and inspection by the FCA and other international regulatory bodies. Consequently, the Group's internal controls, governance, procedures and capital are reviewed on a continuous basis. Both management and the Board ensure that the Group is compliant with its regulatory obligations at all times. In 2011, as part of the Gartmore acquisition process, the Group was granted a new investment firm waiver from consolidated supervision which is valid until April 2016.

The regulatory capital surplus of the Group under the parent financial holding company test was £983m as at 31 December 2013 (2012: £954m) .

Despite having the above-mentioned waiver, the Group does monitor its capital position without it. Good progress has been made on reducing the Group's consolidated capital deficit since the Gartmore acquisition, whereas at 31 December 2013 it had fallen to below £100m.

Dividends

The Board is recommending a final dividend for 2013 of 5.85p per share which will bring the total dividend for 2013 to 8.00p per share, an increase of 11.9%. The proposed final dividend will be paid on 30 May 2014 to shareholders on the register on 9 May 2014. We will continue to maintain a progressive dividend policy. However, rather than applying a formula to determine the interim dividend, as has been the case historically, the Board will actively review both the interim and final dividends in 2014.

Roger Thompson

Chief Financial Officer

Summary of movements in AUM

1. Private Equity funds' closing AUM is based on 30 September 2013 valuations.

2. Other includes US Mutuals, Investment Trusts, Liquidity funds and Property allocations.

3. Approximately £1.0bn of assets were reclassified from Equities to Fixed Income as at 1 January 2013 to conform with the Group's ongoing presentation.

4. Includes AUM of the Henderson UK Property Unit Trust which will remain with the Group following establishment of the TH Real Estate JV.

5. Certain categorisations and cross-holding adjustments have been made following the implementation of a new AUM system in December 2013. In addition, this includes £199m of AUM acquired as a result of the Group's acquisition of H3 Global Advisors in November 2013 and the Group's share of 90 West AUM acquired in April 2013.

6. Equity asset class includes Multi-Asset.

Key performance indicators

Measuring our performance

Earnings per share on continuing underlying profit (p)

Link to strategy

Continue to operate efficiently: Build scale and provide good returns to shareholders through the market cycle by exercising strong financial management while continuing to retain our talented staff and meet our clients' needs.

Develop our global business: Build distribution coverage around the world in areas where we can make the best use of our talents and resources to add value for our clients.

Performance in 2013

· Continuing underlying diluted earnings per share increased by 26% to 13.0p per share. Primarily driven by improved profitability, but also enhanced by a lower effective tax rate.

Priorities for 2014

· Deliver on our strategic priorities to continue growth in profit and thus earnings per share. 

· Maintain the Group's cost discipline whilst investing in the future growth of the business.

Continuing fee margins (bps)

Link to strategy

Shape our product offering to meet the future needs of our clients: Leverage our expertise across our core capabilities by finding attractive and innovative investment opportunities globally to provide products which consistently meet our clients' investment needs both now and into the future.

Performance in 2013

· Total fee margin increased by 12% to 78.2bps. Improvement highlighted stability in management fee margins and increased performance fees earned during year.

· Net margin increased by 18% to 28.1bps. Reflected improvement in underlying profitability, partly driven by performance fees earned.

Priorities for 2014

· Maintain and protect fee margins whilst remaining competitive in the marketplace.

· Focus on net fund inflows into higher margin products whilst ensuring successful outcome for our clients.

Compensation ratio and operating margin (%)

Link to strategy

Continue to operate efficiently: Build scale and provide good returns to shareholders through the market cycle by exercising strong financial management while continuing to retain our talented staff and meet our clients' needs.

Performance in 2013

· Operating margin improved to 35.7% in 2013 from 34.1% in 2012. Reflected strength and stability of core business whilst still investing for future growth.

· Compensation ratio increased to 45.0% in 2013 from 40.5% in 2012. Higher variable compensation driven by performance fee bonuses and strong performance metrics across the business.

Priorities for 2014

· Maintain operating margin by continuing to remain diligent on operational efficiency as we continue to invest in the future growth of the business.

· Maintain alignment of staff remuneration with client and shareholder interests.

Total net fund flows (£bn)

Link to strategy

Develop our global business: Build distribution coverage around the world in areas where we can make the best use of our talents and resources to add value for our clients.

Shape our product offering to meet the future needs of our clients: Leverage our expertise across our core capabilities by finding attractive and innovative investment opportunities globally to provide products which meet our clients' investment needs.

Continue to deliver a first-class client service: Ensure our people understand our clients' needs so that we are able to provide excellent service wherever they may be.

Performance in 2013

· Retail net fund inflows totalling £4.4bn, captured across all geographies, fund ranges and capabilities. 

· Total net fund inflows of £2.5bn reflected outflows experienced in our institutional business in 1H13. Institutional net funds inflows of £0.1bn in 2H13 are encouraging as institutional fund flows stabilise.

Priorities for 2014

· Invest in and develop our distribution networks across all regions to capitalise on our strong position across all our core capabilities.

· Build partnerships to enable greater access to clients across all regions.

Total investment performance over 1 and 3 years (%)

Link to strategy

Shape our product offering to meet the future needs of our clients: Leverage our expertise across our core capabilities by finding attractive and innovative investment opportunities globally to provide products which consistently meet our clients' investment needs both now and into the future.

Continue to deliver a first-class client service: Ensure our people understand our clients' needs so that we are able to provide excellent service wherever they may be.

Performance in 2013

· Investment performance across all core capabilities continued to be very strong.

· At the end of 2013, 78% of funds had outperformed over one year and 82% had outperformed over three years, demonstrating consistently strong performance.

Priorities for 2014

· Continue to strengthen our existing investment capabilities with new talent, where appropriate.

· Build or acquire selected new capabilities as we look to globalise our business.

Treating Customers Fairly (TCF)

Link to strategy

Continue to deliver a first-class client service: Ensure our people understand our clients' needs so that we are able to provide excellent service wherever they may be.

Performance in 2013

· Invested in a number of initiatives to implement the recommendations in the "retail customer interests review" undertaken during 2013. Initiatives cover four interdependent strategic themes: understanding; process; culture; and control and oversight.

· This wide ranging programme of actions will further embed the fair treatment of customers across our business.

Priorities for 2014

· Capitalise on initiatives undertaken in 2013 to further ensure clients are at the heart of everything we do. 

· Continue to monitor our products and the information we provide to clients ensuring they meet their requirements and expectations.

· The continuous monitoring of key TCF metrics will continue to be overseen by the Board and senior management.

Risk management

Risk management framework

Overall accountability for risk management lies with the Board who articulate the risks that the Group is willing to take in pursuit of its strategy through the Group's risk appetite statement. The risk appetite statement was reviewed in 2013 by the Board which enhanced its clarity relating to the obligation of all employees to act in the best interests of our clients at all times. The risk appetite statement covers eight main themes regarded as essential to the successful delivery of the Group's strategy and goals:

· Client and fund investment focus;

· Group financial stability;

· Group growth and performance;

· Operational risk;

· People risk;

· Regulatory change;

· Reputational risk; and

· Trust. 

In order to manage risk effectively, the Board and senior management have to take a forward looking view and our risk management process aims to identify new and emerging risks at an early stage so that these are assessed alongside known and continuing risks. The principal risks faced by the Group, together with the approach to mitigating these risks to ensure that the Group's risk profile remains within its risk appetite, are described on pages 15 to 16.

The risk management framework is set out in the Group's risk policy, a summary of which can be found on our website (www.henderson.com).

Three lines of defence

Our framework utilises a 'three lines of defence' approach to managing risk. The first line comprises business management who have primary responsibility for day-to-day management of risk in their area and ensuring that effective controls are in place. The principle of individual accountability and responsibility for risk awareness and risk management is an important feature of our culture. Senior management also exercises its responsibilities for risk management through the Executive Committee (ExCo), which formulates risk strategy and manages the business in accordance with the Group's risk appetite. There are also a number of management committees chaired by, and consisting of, senior managers and which have responsibility for managing specific areas of risk.

The second line comprises Risk and Compliance functions which monitor the financial, operational and regulatory risks in the business and the related controls in place to manage these risks. These functions provide independent oversight of the risk management performed by the first line. The Chief Risk Officer (CRO) reports independently of management to the Chair of the Board Risk Committee (BRC) and attends all Board, Audit Committee and BRC meetings; the CRO and the Risk and Compliance functions provide reports to each Committee meeting.

The principal activities of the BRC during 2013 are described overleaf. The CRO is also a member of the ExCo and regular reports are provided to ExCo by the Risk and Compliance functions. Members of the Risk and Compliance functions participate in the management committees that have specific risk responsibilities and chair those committees with risk oversight responsibilities.

Internal Audit is the third line of defence and provides independent assurance that the controls are appropriate and are operating effectively, making recommendations for improvements and monitoring management action plans to implement such improvements. Internal Audit operates and reports independently of line management to the Chair of the Audit Committee.

Board Risk Committee's principal activities during 2013

The BRC received risk management reports which addressed real and potential emerging risks, strategic and operational risks and topical matters such as cyber-crime and regulatory updates. During the year, the Group has explored a number of acquisition opportunities and completed two; the Committee reviewed and challenged the risk assessments provided by the CRO throughout the acquisition process. Entering in to the agreement to divest part of the Property business to a new joint venture with TIAA-CREF, TH Real Estate, was also subject to review, challenge and oversight by the Committee.

The pace of regulatory change has continued unabated during 2013. Whereas in earlier years, the challenge was to keep up with the evolving requirements, in 2013 the focus was on implementation of the AIFMD (covering the Group's Property, Hedge Fund, Investment Trust and other activities) and the derivatives related EMIR (European) and Dodd-Frank (US) requirements. The Group is on track with implementing these and other evolving regulatory requirements, related policies and procedures. Regulatory pronouncements such as the UK FCA Retail Conduct Risk Outlook, the FCA reviews of Conflicts and Outsourcing risk, the Financial Stability Board and European Securities and Markets Authorities quarterly risk assessments are also reviewed by the Committee.

There has been a marked increase during 2013 in the press coverage of cyber-crime incidents experienced by companies throughout the world. The Group has an Information Security Management Committee, which assesses, monitors and controls related risks including cyber-crime and the BRC, which reviews the activities, plans and risk assessments carried out by the Group.

A key component of the risk management framework is culture, and the employees' attitude to, and awareness of, the need for effective risk management and controls. At each Committee meeting, the Risk function and management are challenged to explain what is being done to promulgate an appropriate culture and attitude to risk management. During the year, an independent third party conducted an effectiveness review of the Group's operational risk environment and reported results, which were satisfactory, to the Committee. Developments identified by the review have either been implemented or are being tracked by the Committee.

An important regular activity conducted by the Group is the semi-annual Internal Capital Adequacy Assessment Process (ICAAP) which involves the first and second lines of defence. This assesses the Group's business and the consequential risks, and estimates the amount of capital to be held by the Group. The Committee reviews and challenges management's assessment and conclusions.

As part of its regular agenda, the Committee reviews business continuity activities and plans, the Reverse Stress Test and risk policies.

Outside the framework of formal meetings, the Chair of the BRC, Sarah Arkle, meets and has regular contact with the Chief Executive, the Chief Financial Officer and the Chief Risk Officer.

Key risks and their mitigation

The key risks faced by the Group fall into a number of distinct categories and the means adopted to mitigate them are both varied and relevant to the nature of the risk concerned.

Acquisition and divestment

Description

· Risk of organisational stress through potential demands on staff and resources through need to integrate acquired businesses or to reorganise processes to divest parts of the business.

· This risk is aligned to the Group's long-term strategy that involves willingness to consider the acquisition of businesses.

Trends in 2013

· Two small acquisitions in Australia.

· Preparation for divestment of part of Property business to TH Real Estate.

Mitigation

· Acquisitions/divestments considered only where they fit with our strategic goals and meet our financial criteria such that we can realise value for our shareholders. The Board's risk appetite statement includes quantitative and qualitative criteria that must be met for any acquisition.

· Thorough due diligence performed before any acquisition is made including assessment of our ability to integrate successfully the acquired business.

· Integration risk, post closing, is managed, monitored and reported.

Credit

Description

· Risk of a counterparty to the Group defaulting on funds deposited with it or the non-receipt of a trade debt.

Trends in 2013

· Credit Default Swap spreads of our principal counterparties narrowed in 2013 indicating reduction in perceived default risk.

· Eurozone stress less pronounced than in 2012, but tail risk still present.

Mitigation

· Credit risk arising from transactions with counterparties is assessed, managed and monitored in line with the Group's risk appetite.

· The Credit Risk Committee meets regularly to approve, review and set limits for all new and existing counterparties.

Foreign currency

Description

· Risk that the Group will sustain losses through adverse movements in exchange rates.

Trends in 2013

· Volatility of foreign exchange rates was relatively low in 2013.

Mitigation

· Holding financial assets and liabilities of equal value in the same currency.

· Limiting the net exposure to an individual currency.

· Hedging currency exposure arising from seed capital investments.

· Risk overseen by a Hedge Committee that submits a monthly report to the Board.

Fund flows

Description

· Risk of net redemptions by clients resulting in a decline in AUM and revenues earned by the Group.

Trends in 2013

· Outflows in 1H13 offset by positive net inflows in 2H13. Overall, strong positive net inflows in FY13.

Mitigation

· Diversity of sources of revenue by asset class, fund style, strategy and geography.

· Diversity of investor base between retail and institutional and by geography and distribution channel.

· Strong investment performance across product ranges.

Key personnel

Description

· Risk of losing either a member of ExCo or one of the Group's key investment or distribution professionals.

· Potential adverse effect on business growth and/or the retention of existing business.

Trends in 2013

· Staff turnover generally low throughout 2013.

· Percentage of Group revenues from funds managed by an individual fund manager remains low.

Mitigation

· Our remuneration structures are competitive and are designed to recognise and reward performance.

· Succession planning to ensure that there is cover for key roles should they become vacant.

· Staff surveys identify any issues which could adversely impact staff retention.

· Comprehensive training is offered to all staff.

· Deliberate strategy to avoid dependence on a single investment manager or team for a high proportion of our revenues, resulting in broad and diverse fund manager teams.

Investment performance

Description

· Risk that funds fail to achieve performance hurdles or benchmarks, leading to client redemptions and reduction in AUM and revenues earned by the Group.

· Poor fund performance will also result in lower performance fees.

Trends in 2013

· Continued strong fund performance with high percentage of funds in 1st and 2nd quartiles over 1 and 3 years.

Mitigation

· Robust investment process including detailed research.

· Clearly articulated investment philosophy including analysis of our funds by comparing their performance against appropriate benchmarks.

· Broad range of funds to reduce the probability of all funds under performing at the same time.

· Independent investment risk function aims to ensure that the level of risk taken for each portfolio is consistent with client mandates and fund prospectuses.

Market

Description

· Risk that market conditions lead to a decline in the value of Group seed capital investments.

· Risk that market conditions lead to a reduction in the value of clients' AUM and revenues earned by the Group.

Trends in 2013

· Significant positive market performance in 2013 resulted in an increase in AUM and in the value of seed capital investments.

Mitigation

· Risk of a fall in the value of clients' AUM is mitigated by having a broad range of clients by distribution channel, product, asset class and region.

· We actively seek fee bases which are not solely calculated by reference to the market value of AUM and a significant amount of our expense base is variable.

· Limits on the aggregate amount of seed capital investments, diversification of the assets invested and appropriate hedging of the risks.

Operational and legal

Description

· Risk of losses through inadequate or failed internal processes, people or systems or through external events. This includes the risk of loss arising from failing to manage key outsourced service providers properly, the risk arising from major disruption to our business, and the risk of losses from breaches of investment mandates.

· Risk of losses from litigation.

Trends in 2013

· Increased prevalence of acts of cyber-crime against firms generally.

· Settlement of litigation against a Henderson subsidiary in respect of Private Equity Infrastructure Fund II.

Mitigation

· Our control systems are designed to ensure operational risks are mitigated to an acceptable level.

· Three lines of defence model is key.

· Outsourced service providers are overseen by the relevant line function and, for key relationships, their controls are also reviewed by the Group's assurance functions.

· We maintain and test business continuity plans which are designed to ensure that, in the event of business disruption, we can maintain our operations without irreparable damage to the business.

Regulatory change

Description

· Risk that a change in laws and regulations will materially affect the Group's business or markets in which it operates.

· This may affect the business either directly or indirectly by reducing investors' appetite for our products, increasing capital requirements, restricting our ability to sell products, pursue certain investment strategies and/or increase the cost and complexity of the Group's business.

Trends in 2013

· Pace of regulatory change remains significant including progress towards implementation of the AIFMD, the Capital Requirements Directive/Regulation and Central Clearing of OTC Derivatives.

Mitigation

· Active and constructive engagement with regulators.

· Regulatory developments are monitored by a dedicated team in Compliance who provide training to the first line where needed.

· Working groups implement required changes to our business processes.

· Compliance monitors ongoing regulatory obligations and engages in regular dialogue with our regulators.

· Active involvement with and through industry bodies.

Reputational

Description

· Risk that negative publicity regarding the Group will lead to client redemptions and a decline in AUM and revenue and/or to litigation.

· The risk of damage to the Group's reputation is more likely to result from one of the other key risks materialising rather than as a standalone risk.

Trends in 2013

· Independent surveys show a strengthening of Henderson's reputation with key stakeholders during 2013.

Mitigation

· Reputational risk is primarily mitigated through the effective mitigation of the other key risks.

· Reputational risk is also mitigated by our client centric culture, which focuses on openness, transparency and delivery for clients.

Financial statements

Consolidated Income Statement

For the year ended 31 December 2013

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2013

Consolidated Statement of Financial Position

As at 31 December 2013

The financial statements were approved by the Board of Directors and authorised for issue on 25 February 2014. They were signed on itsbehalf by:

Richard Gillingwater

Chairman

Consolidated Statement of Changes in Equity

For the year ended 31 December 2013

Consolidated Statement of Cash Flows

For the year ended 31 December 2013

Reconciliation of cash and cash equivalents

Cash flows from discontinued operation

Company Income Statement

For the year ended 31 December 2013

Company Statement of Comprehensive Income

For the year ended 31 December 2013

Company Statement of Financial Position

As at 31 December 2013

The financial statements were approved by the Board of Directors and authorised for issue on 25 February 2014. They were signed on its behalf by:

Richard Gillingwater

Chairman

Company Statement of Changes in Equity

For the year ended 31 December 2013

Company Statement of Cash Flows

For the year ended 31 December 2013

Notes to the Financial Statements

Group and Company

1. Authorisation of financial statements and statement of compliance with IFRS

The Group and Company financial statements for the year ended 31 December 2013 were authorised for issue by the Board of Directors on 25 February 2014 and the respective statements of financial position were signed on the Board's behalf by the Chairman. Henderson Group plc is a public limited company incorporated in Jersey and tax resident in the United Kingdom. The Company's ordinary shares are traded on the LSE and CDIs are traded on the ASX.

The Group and Company financial statements have been prepared in accordance with IFRS as adopted by the European Union and the provisions of the Companies (Jersey) Law 1991.

2. Accounting policies2.1 Significant accounting policies

Basis of preparation

The Group and Company financial statements have been prepared on a going concern basis and on the historical cost basis, except for certain financial instruments that have been measured at fair value.

The Group and Company financial statements are presented in GBP and all values are rounded to the nearest one hundred thousand pounds (£0.1m), except when otherwise indicated.

A glossary is included in this Annual Report that defines certain accounting terms used in these financial statements.

Basis of consolidation

The consolidated financial statements of the Group comprise the financial statements of Henderson Group plc and its subsidiaries as at 31 December each year.

The financial statements of all the Group's significant subsidiaries are prepared to the same year end date as that of the Company. The accounts of all material subsidiaries are prepared under either IFRS or local GAAP. Where prepared under local GAAP, balances reported by subsidiaries are adjusted to meet IFRS requirements for the purpose of the consolidated financial statements.

The results of subsidiaries acquired or disposed of during the year are included in the Consolidated Income Statement from the effective date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that the control ceases. The Group demonstrates control where it has the current ability to direct the strategy and operations of subsidiaries. Non-controlling interests represent the third party interests in subsidiaries that are not held by the Group.

Interests in property closed-ended funds, private equity infrastructure funds and open-ended pooled funds, such as OEICs and unit trusts, are accounted for as subsidiaries, associates, joint ventures or other financial investments depending on the equity holdings of the Group and on the level of influence and control that the Group exercises. The Group's investment in associates, where the Group has the ability to exercise significant influence as well as joint ventures where there is joint control, are accounted for using the equity method of accounting. Under the equity method of accounting, the Group presents its share of its economic interest in these investments in the financial statements.

Presentation of the Consolidated Income Statement

The Group maintains a columnar format for the presentation of its Consolidated Income Statement. The columnar format enables the Group to continue its practice of improving the understanding of its results by presenting profit for the year before certain acquisition related and non-recurring items. This is the profit measure used to calculate EPS on underlying profit (refer to note 10) and is considered to be the most appropriate as it better reflects the Group's underlying trading performance. Profit before acquisition related and non-recurring items is reconciled to profit before tax on the face of the Consolidated Income Statement.

The column 'Acquisition related and non-recurring items' comprises:

· acquisition related items: the amortisation of intangible assets, void property finance charges and costs in relation to pre-acquisition share awards; and

· non-recurring items: deemed to be one-off and material, when considering both size and nature.

These items are disclosed separately to give a clearer presentation of the Group's results and are analysed further in note 7.

Income recognition

Fee income

Fee income includes management fees, transaction fees and performance fees (including earned carried interest). Management fees and transaction fees are recognised in the accounting period in which the associated investment management or transaction services are provided. Performance fees are recognised when the prescribed performance hurdles are achieved and it is probable that a fee will crystallise as a result. Initial fees and commissions receivable are deferred and amortised over the anticipated period in which services will be provided, determined by reference to the average term of investment in each product on which initial fees and commissions are earned.

Finance income

Interest income is recognised as it accrues using the effective interest rate method. Other net investment income is recognised on the date that the right to receive payment has been established. The net interest credit on the Group's defined benefit asset has been recognised in finance income.

Post-employment benefits

The Group provides employees with retirement benefits through both defined benefit and defined contribution schemes. The assets of these schemes are held separately, from the Group's general assets, in trustee administered funds.

Defined benefit obligations and the cost of providing benefits are determined annually by independent qualified actuaries using the projected unit credit method.

The obligation is measured as the present value of the estimated future cash outflows using a discount rate based on AA rated corporate bond yields of appropriate duration. The resulting surplus or deficit of defined benefit assets less liabilities is recognised in the Consolidated Statement of Financial Position, net of any taxes that would be deducted at source. The Group's expense related to the defined benefit schemes is recognised over the employees' service lives, based upon the actuarial cost for the accounting period, having considered the net interest credit or cost on the net defined benefit asset or liability. Recognised actuarial gains and losses are included in the Consolidated Statement of Comprehensive Income in the accounting period in which they occur, net of any taxes that would be deducted at source. Normal contributions to the defined contribution scheme are expensed in the Consolidated Income Statement as and when they become payable.

Share-based payment transactions

The Group issues share-based awards to employees all of which are classified as equity-settled share-based payments. Equity-settled share-based payments are measured at the fair value of the shares at the grant date. The awards are expensed, with a corresponding increase in reserves, on either a straight-line basis or a graded basis (depending on vesting conditions) over the vesting period, based on the Group's estimate of shares that will eventually vest. Based on the Group's estimate, the determination of fair value is adjusted for the effects of market performance and behavioural considerations.

Income taxes

The Group provides for current tax expense according to the tax laws in each jurisdiction in which it operates, using tax rates that have been enacted or substantively enacted by the reporting date.

Deferred tax is provided on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are recognised only to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax liabilities are not recognised on goodwill but are recognised on separately identifiable intangible assets. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax liabilities are not recognised for taxable differences arising on investments in subsidiaries, branches, associates and joint ventures where the Group controls the timing of the reversal of the temporary differences and where the reversal of the temporary differences is not anticipated in the foreseeable future.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised, based on tax rates and tax laws that have been enacted or substantively enacted by the reporting date.

Income tax relating to items recognised in the Consolidated Statement of Comprehensive Income are also recognised in that statement and not in the Consolidated Income Statement.

Sales taxes

Assets and expenses are recognised net of sales taxes, except where the sales tax is not recoverable, in which case the sales tax is recognised as part of the cost of acquisition of an asset or as part of the relevant expense. Receivables and payables are stated with the amount of sales taxes included. The net amount of sales tax recoverable from, or payable to, the tax authority, is included within receivables or payables in the Consolidated Statement of Financial Position.

Foreign currencies

The functional currency of the Company is GBP. Transactions in foreign currencies are recorded at the appropriate exchange rate prevailing at the date of the transaction. Foreign currency monetary balances at the reporting date are converted at the prevailing exchange rate. Foreign currency non-monetary balances carried at fair value or cost are translated at the rates prevailing at the date when the fair value or cost is determined. Gains and losses arising on retranslation are taken to the Consolidated Income Statement, except for available-for-sale financial assets where the unhedged changes in fair value are recognised in the Consolidated Statement of Comprehensive Income.

On consolidation, the assets and liabilities of the Group's overseas operations whose functional currency is not GBP are translated at exchange rates prevailing at the reporting date. Income and expense items are translated at average exchange rates for the accounting period. Exchange differences arising, if any, are taken through the Consolidated Statement of Comprehensive Income to the translation reserve. In the period in which an operation is disposed of, translation differences previously recognised in the translation reserve are recognised in the Consolidated Income Statement.

Business combinations

All business combinations are accounted for using the purchase method (acquisition accounting). The cost of a business combination is the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed and equity instruments issued by the acquirer. The fair value of a business combination is calculated at the acquisition date by recognising the acquiree's identifiable assets, liabilities and contingent liabilities that satisfy the recognition criteria, at their fair values at that date. The acquisition date is the date on which the acquirer effectively obtains control of the acquiree. The cost of a business combination in excess of fair value of net identifiable assets or liabilities acquired, including intangible assets identified, is recognised as goodwill. Any costs incurred in relation to a business combination after 1 July 2009are expensed as incurred.

Goodwill

Goodwill arising on acquisitions is capitalised in the Consolidated Statement of Financial Position. Goodwill on acquisitions prior to 1 January 2004 is carried at its value on 1 January 2004 less any subsequent impairments.

Goodwill arising on investments in associates and joint ventures is included within the carrying value of the equity accounted investments.

Impairment of goodwill

Goodwill is reviewed for impairment annually or more frequently if changes in circumstances indicate that the carrying value may be impaired. For this purpose, management prepares a valuation for each cash generating unit based on its value in use. The value in use is based on forecasts approved by the Board, extrapolated for expected future growth rates and discounted at a risk adjusted discount rate based on the Group's post-tax weighted average cost of capital. Where the value in use is less than the carrying amount, an impairment is recognised. Any impairment is recognised immediately through the Consolidated Income Statement and cannot subsequently be reversed. Where goodwill forms part of an entity or sub-group and the entity or sub-group or part thereof is disposed of, the goodwill associated with the entity or sub-group disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal.

Investment management contracts

Investment management contracts have been identified as a separately identifiable intangible asset arising on the acquisition of subsidiaries. Such contracts are recognised at the present value of the expected future cash flows of the investment management contracts at the date of acquisition. The intangible asset is then amortised on a straight-line basis over the expected life of the contracts, currently estimated at between three and eight years.

Computer software

The costs of purchasing and developing computer software are capitalised where it is probable that future economic benefits that are attributable to the assets will flow to the Group and the cost of the assets can be measured reliably. Computer software is subsequently measured at cost less accumulated amortisation.

Investments in subsidiaries

Investments by the Company in subsidiary undertakings are held at cost less any impairment in value where circumstances indicate that the carrying value may not be recoverable.

Equity accounted investments

Equity accounted investments comprise investments in associates and joint ventures held by the Group. Investments are recognised initially at cost. The investments are subsequently carried at cost adjusted for the Group's share of profits or losses and other changes in comprehensive income of the associate or joint venture, less any dividends or distributions received by the Group. The Consolidated Income Statement includes the Group's share of profits or losses after tax for the year, or period of ownership, if shorter.

Impairment of assets (excluding goodwill and financial assets)

At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes an estimate of the recoverable amount, being the higher of an asset's fair value less cost to sell, and its value in use. In assessing value in use, the estimated future cash flows are discounted to their net present value using a risk adjusted discount rate based on the Group's post-tax weighted average cost of capital.

Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered to be impaired and is written down to its recoverable amount. An impairment loss is recognised in the Consolidated Income Statement.

Held for sale classification

The Group has classified its Property business and those subsidiaries purchased exclusively with a view to resale, such as seed capital investments, as held for sale, as their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. These are measured at the lower of their carrying amount, and fair value less costs to sell. The Group deems that the criteria for held for sale classification have been satisfied as the sale of the Property business and seed capital investments is considered highly probable and available for immediate sale in their present condition. The sales are expected to complete within one year from the date of classification as held for sale.

Discontinued operation

The Group has presented its Property business as a discontinued operation with its results excluded from those of continuing operations. The results of the Property business are presented as a discontinued operation in the Consolidated Income Statement. Transaction costs, net of tax, incurred by the Group due to the disposal of the Property business, are included within the discontinued operation line in the Consolidated Income Statement.

Financial instruments

Financial assets and liabilities are recognised at fair value in the Consolidated Statement of Financial Position when the Group becomes party to the contractual provisions of an instrument. The fair value recognised is adjusted for transaction costs, except for financial assets classified at fair value through profit or loss, where transaction costs are immediately recognised in the Consolidated Income Statement. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or where they have been transferred and the Group has also transferred substantially all risks and rewards of ownership. Financial liabilities cease to be recognised when the obligation under the liability has been discharged or cancelled or has expired.

Financial assets

Purchases and sales of financial assets are recognised at the trade date, being the date when the purchase or sale becomes contractually due for settlement. Delivery and settlement terms are usually determined by established practices in the market concerned.

Debt securities, equity securities and holdings in authorised collective investment schemes are designated as either fair value through profit or loss, or available-for-sale, and are measured at subsequent reporting dates at fair value. The Group determines the classification of its financial assets on initial recognition. Financial assets classified as fair value through profit or loss comprise the Group's manager box positions in OEICs and unit trusts and investments in the Group's fund products on behalf of employee benefit trusts. Where securities are designated as fair value through profit or loss, gains and losses arising from changes in fair value are included in the Consolidated Income Statement. Where investments in the Group's fund products are held against outstanding deferred compensation liabilities, any movement in the fair value of these assets will be offset by a corresponding movement in the deferred compensation liability in the Consolidated Income Statement.

For available-for-sale financial assets, gains and losses arising from changes in fair value which are not part of a designated hedge relationship are recognised in the Consolidated Statement of Comprehensive Income. When an asset is disposed of, the cumulative changes in fair value, previously recognised in the Consolidated Statement of Comprehensive Income, are taken to the Consolidated Income Statement in the current accounting period.

Unrealised gains and losses on financial assets represent the difference between the fair value of financial assets at the reporting date and cost or, if these have been previously revalued, the fair value at the last reporting date. Realised gains and losses on financial assets are calculated as the difference between the net sale proceeds and cost or amortised cost.

Where a fall in the value of an investment is prolonged or significant, it is considered an indication of impairment. In such an event, the investment is written down to fair value and the amounts previously recognised in the Consolidated Statement of Comprehensive Income in respect of cumulative changes in fair value, are taken to the Consolidated Income Statement as an impairment charge.

Trade receivables, which generally have 30 day payment terms, are initially recognised at fair value, normally equivalent to the invoice amount. When the time value of money is material, the fair value is discounted. Provision for specific doubtful debts is made when there is evidence that the Group may not be able to recover balances in full. Balances are written off when the receivable amount is deemed irrecoverable.

Cash amounts represent cash in hand and on-demand deposits. Cash equivalents are short-term highly liquid government securities or investments in money market instruments with a maturity date of three months or less.

Financial liabilities

Financial liabilities are stated at amortised cost using the effective interest rate method. Amortised cost is calculated by taking into account any issue costs and any discount or premium on settlement.

Derivative financial instruments and hedging

The Group may, from time to time, use derivative financial instruments to hedge against price, interest rate, foreign currency and credit risk. Derivative financial instruments are classified as financial assets when the fair value is positive or as financial liabilities when the fair value is negative.

At the inception of a hedge, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. Such hedges are expected to be effective in achieving offsetting changes in fair value and are assessed on an ongoing basis to determine that they have been effective throughout the reporting periods for which they were designated and are expected to remain effective over the remaining hedge period.

Currency hedges

Forward foreign currency contracts are used to hedge the currency nominal value of certain non-GBP denominated available-for-sale financial assets and are classified as fair value hedges. The change in the fair value of a hedging instrument is recognised in the Consolidated Income Statement. The change in the fair value of the hedged item, attributable to the risk being hedged, is also recognised in the Consolidated Income Statement, offsetting the fair value changes arising on the designated hedge instrument.

Fair value estimation

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of financial instruments traded in active markets (such as publicly traded securities and derivatives) is based on quoted market prices at the reporting date. The quoted market price used for financial instruments is the last traded market price for both financial assets and financial liabilities where the last traded price falls within the bid-ask spread. In circumstances where the last traded price is not within the bid-ask spread, management will determine the point within the bid-ask spread that is most representative of fair value current bid price. The fair value of financial instruments that are not traded in an active market is determined using valuation techniques commonly used by market participants, including the use of comparable recent arm's length transactions, discounted cash flow analysis and option pricing models.

Provisions

Provisions which are liabilities of uncertain timing or amount, are recognised when: the Group has a present obligation, legal or constructive, as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount. In the event that the time value of money is material, provisions are determined by discounting the expected future cash flows at a discount rate that reflects a current market assessment of the time value of money and, where appropriate, the risks specific to the liability. When discounting, the increase in the provision due to the passage of time is recognised as a finance charge.

Equity shares

The Company's ordinary equity shares of 12.5 pence each are classified as equity instruments. Equity shares issued by the Company are recorded at the fair value of the proceeds received or the market price on the day of issue. Direct issue costs, net of tax, are deducted from equity through share premium. When share capital is repurchased, the amount of consideration paid, including directly attributable costs, is recognised as a change in equity.

Own shares held

Own shares held are equity shares of the Company acquired by or issued to employee benefit trusts. Own shares held are recorded at cost and are deducted from equity. No gain or loss is recognised in the Consolidated Income Statement on the purchase, issue, sale or cancellation of the Company's own equity shares.

Dividend recognition

Dividend distributions to the Company's shareholders are recognised in the accounting period in which the dividends are paid and, in the case of final dividends, when these are approved by the Company's shareholders at the AGM. Dividend distributions are recognised in equity.

2.2 Significant accounting judgements, estimates and assumptions

In the process of applying the Group's accounting policies, management has made significant judgements involving estimations and assumptions which are summarised below:

Held for sale classification

An assessment was made as at 31 December 2013 that the Property business and seed capital investments controlled by the Group, met the definition to be classified as held for sale in the Consolidated Statement of Financial Position.

Discontinued operation

Management has determined that the Property business represents a major line of business and therefore should be reported as a discontinued operation.

Impairment of intangible assets

Goodwill and investment management contracts are reviewed for impairment annually or more frequently if there are indicators that the carrying value may be impaired.

The judgement exercised by management in arriving at these valuations includes the selection of market growth rates, fund flow assumptions, expected margins and costs. Further details on these assumptions are given in note 14.

Share-based payment transactions

The Group measures the cost of equity-settled share schemes at fair value at the date of grant and expenses them over the vesting period based on the Group's estimate of shares that will eventually vest.

Consolidation of seed capital investments

From time to time, the Group invests seed capital on the launch of products, such as UCITS, SICAVs, hedge funds, property and private equity funds and other investment vehicles. The seed capital investments vary in duration depending on the nature of the investment, with a typical range of less than one year for equity and fixed income products and between three and seven years for private equity and property products. The Group reviews the size and nature of these investments to consider whether it has or control over the underlying funds to warrant accounting for them using the equity method, consolidating them into the Group's financial statements or classifying them as held for sale.

Impairment of available-for-sale financial assets

Available-for-sale financial assets are reviewed for impairment at each reporting date or more frequently if there are indicators that the carrying value is impaired. In specific cases, where a quoted market price or fair value is not available, significant judgement is exercised by management in determining the extent of impairment, taking into account other available market data. Management also exercises judgement in determining whether a decrease in the value of an asset meets the prolonged or significant tests.

Pension and other post-employment benefits

The costs of, and period end obligations under, defined benefit pension schemes are determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the long-term nature of these schemes, such estimates are subject to significant uncertainty. Further details are given in note 21.

Provisions

By their nature, provisions often reflect significant levels of judgement or estimates by management. The nature and amount of the provisions included in the Consolidated Statement of Financial Position are detailed in note 22 and contingencies not provided for are disclosed in note 32.

Deferred tax assets

Deferred tax assets are recognised for unused tax losses to the extent that it is probable that future taxable profits will be available against which the losses can be utilised. Significant judgement is required by management in determining the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits and the likely timing of deduction of the relevant expenses.

2.3 Changes in accounting policies

The accounting policies adopted in this Annual Report are consistent with those of the previous financial year with the following exceptions caused by the adoption of the following standards on 1 January 2013. The Group has also adopted any IFRS or IFRIC interpretations that are effective for the first time for the financial year beginning on or after 1 January 2013.

IFRS 13 Fair Value Measurement has been applied prospectively and has only resulted in amendments to disclosures.

IAS 1 Presentation of Financial Statements has been applied retrospectively and has led to the Consolidated Statement of Comprehensive Income presenting items grouped on whether they are potentially reclassifiable to the Consolidated Income Statement.

IAS 19 Employee Benefits amended (IAS 19a) has been applied retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and has led to the restatement of prior year amounts relating to the Group's defined benefit pension schemes. The significant impact of adopting IAS 19a on the Group's financial statements is the replacement of interest costs on scheme liabilities and the expected return on scheme assets with a net interest cost that is calculated by applying a discount rate to the net defined benefit asset or liability.

The Group has also restated the Consolidated Income Statement and Statement of Financial Position, with no resultant effect on any profit measure or net assets, relating to initial charges and commissions that have previously been recognised gross of discounts. Further details of the restatements are set out in note 34.

2.4 Future changes in accounting policies

A number of new standards and amendments to standards and interpretations are effective for periods beginning on or after 1 January 2014. The following new standards are not applicable to these financial statements but are expected to have an impact when they become effective. The Group plans to apply these standards in the reporting period in which they become effective.

IFRS 10 Consolidated Financial Statements defines the principle of control, and establishes control as the basis for consolidation in the preparation of consolidated financial statements. This standard has a mandatory effective date in 2014.

IFRS 11 Joint Arrangements states that when deciding how to account for joint ventures, the focus is on rights and obligations. This standard has a mandatory effective date in 2014.

IFRS 12 Disclosure of Interests in Other Entities includes the disclosure requirements for all forms of interests in other entities, such as joint arrangements, associates and other off balance sheet vehicles. This standard has a mandatory effective date in 2014.

IFRS 9 Financial Instruments proposes revised measurement and classification criteria for financial assets. This standard is currently expected to become effective in 2016 or thereafter.

The Group is assessing the impact of the above standards on the Group's future financial statements.

3. Income

Group