Schroders Regulatory News (SDR)

Schroders full-year results 29 February 2024

Execution of our strategy delivers growth despite industry headwinds

Financial highlights

Strategic highlights

¹Please refer to Additional Information for more information about client investment performance.

Peter Harrison, Group Chief Executive, said:

"In one of the most challenging years for global active asset managers in recent times, our resilient performance in 2023 demonstrated the consistent execution and benefits of our long-term strategy for clients and shareholders. In 2016, we set out to build a stronger presence across Private Markets, Wealth Management and Solutions. The strong growth rates of these businesses mean they now account for 56% of our AUM and 48% of our net operating revenue.

We saw notable growth in assets under management and positive net new business, winning important new clients. Our Wealth Management advisory business achieved a standout performance, with strong advised organic growth. Schroders Capital saw good fundraising against a tough backdrop, and we saw positive net flows across all four pillars, especially real estate. This performance was underpinned by our differentiated strategy.

Looking forward, the markets remain unsettled because of geopolitical uncertainty in a year of electoral change. Whilst our profits last year were impacted by headwinds in the markets and adverse foreign exchange rates, we took steps to pro-actively manage our cost base and delivered efficiency initiatives to enable future reinvestment in the business. We therefore start this year in a strong position to capitalise on some interesting market opportunities, with the prospect of interest rates falling and the rotation of clients' assets back into risk assets."

Management statement

Last year, the asset management industry faced one of its most challenging years in recent times. Despite the turbulent macroeconomic backdrop, volatile markets and heightened geopolitical tension that characterised 2023, our clear strategy enabled us to deliver positive flows and growth in AUM.

The size and shape of our business has changed significantly over the past seven years, reflecting the investments we have made in our strategic growth areas of Wealth Management, Private Markets and Solutions. Their AUM has grown by a compound annual growth rate of 15% over that time, and today, they make up 56% of our AUM (including joint ventures and associates) and 48% of our net operating revenues. Our successful pivot towards these higher growth and higher longevity areas has diversified the sources of revenue we rely on, resulting in more resilient financial performance.

We have made material upgrades to our operating platform over the same period. These factors, combined with our depth and breadth of expertise in Public Markets and our leadership in sustainability, have positioned us with the global capabilities to deliver solutions that address our clients' complex investment needs.

Strategic progress

The merits of our strategic choices and diversification were evidenced by the combined NNB we generated across our strategic growth areas, which totalled £23.1 billion. Our Public Markets business was more impacted by market sentiment. In particular, the rise in risk-free rates made cash an increasingly attractive investment alternative over the near term. This business saw net outflows of £13.4 billion from mutual funds and institutional mandates. Total NNB excluding joint ventures and associates was £9.7 billion and £1.0 billion including joint ventures and associates.

Market dynamics were complex in 2023. In the US, market gains were disproportionately driven by just a few companies - the so-called "magnificent seven". Against this challenging backdrop for active investors, we delivered positive outcomes for our clients over the medium and long term, with 60% and 77% of client assets outperforming their relevant comparator over three and five years respectively.

Through positive NNB and investment returns, we grew total AUM by 2% to £750.6 billion (2022: £737.5 billion) despite an adverse foreign exchange headwind of £25.8 billion.

In Wealth Management, we saw momentum continue, as we again delivered a strong advised organic NNB growth rate of 8% (excluding joint ventures and associates), up from 7% in 2022. All three of our wealth services, advice, platform and managed assets, generated positive net new business. Wealth Management now makes up 23% of our operating profit. Its continued strong performance contributes meaningfully to the overall performance of the Group.

We saw continued success in the high and ultra-high-net-worth bracket via Cazenove Capital which drove the majority of net flows. Our UK regional development initiative made a sustained contribution to NNB, and our successes in the family office space culminated with Schroders being awarded Spears' 2023 Family Office services Provider of the Year. Despite the current cost-of-living crisis, which saw some UK affluent investors prioritise immediate spending, our adviser platform business, Benchmark, also delivered an organic NNB growth rate of 5%. Schroders Personal Wealth (SPW), our joint venture with Lloyds Banking Group, was resilient given the impact of the macro environment on the affluent wealth segment. SPW delivered positive net new business of £0.3 billion, 6% growth in the number of advised clients and a 23% increase in the average value of new client investments.

Schroders Capital, our Private Markets business, achieved fundraising of £9.3 billion in 2023 despite the broader cyclical slowdown in private markets and cautious investment sentiment. We saw positive net flows in all four pillars: private equity, private debt, infrastructure and real estate. While we achieved NNB of £4.5 billion, below our medium-term target of £7-10 billion per annum, we have an additional £4.0 billion in non-fee earning dry powder ready to be deployed. We anticipate an improvement in fundraising and deployment dynamics over the medium term. The strength of the long-term structural trends that underpin the shift to private markets remain strong. This, combined with our well diversified product range and the progress made to further scale our platform gives us confidence in the outlook for this business.

We generated NNB of £12.0 billion in Solutions, as clients looked to us as their trusted investment partner. The strength of our investment and client service proposition helped our clients navigate the "gilt crisis" last year and contributed to an improvement in our brand recognition and overall market position. Subsequently, we saw strong demand for our outsourced chief investment officer (OCIO) and Liability Driven Investment (LDI) services. Our overall Solutions AUM increased to a new high of £228.3 billion, despite industry buy-out activity.

The depth and breadth of our public markets offering remains a key differentiator and we operate in 38 locations globally, servicing a range of client types with solutions across all major asset classes. In 2023, we ranked fourth globally in NMG Consulting's institutional brand rankings for sustainability. We also secured the top rating for action and transparency on climate change, being awarded "A" in the CDP climate change assessment, ranking us in the top 2% of responding companies. We believe this leadership in sustainability supports our flows in the branded intermediary space. Specifically, 2023 demonstrated the continued demand for our thematic product range, which delivered positive NNB for the fifth year in a row.

While we saw outflows of £13.4 billion in Public Markets, performance in Mutual Funds was resilient given the scale of wider industry active outflows, and we gained market share in the UK. Our partnership with Hartford in the US performed particularly strongly, ranking in the top 4% for active and passive mutual fund flows in the US. In total, Hartford funds delivered £1.1 billion NNB. We also saw strong inflows into the Global Sustainable Growth (£1.0 billion) and EURO Corporate Bond strategies (£1.0 billion).

In Institutional, outflows were driven by redemptions from low-margin mandates, leading to an increase in the net operating revenue margin for the business area. Net inflows into Global, Asia Pacific and Australian equities of £1.3 billion combined partly offset these outflows.

Across the Group, we continued to invest and innovate, resulting in several noteworthy achievements:

Financial performance

While closing AUM for the year was up, we entered 2023 with a headwind from depressed market values following the fall in markets in the second half of 2022. This impacted average AUM for 2023, which was 3% lower than the prior year at £619.7 billion (2022: £636.2 billion), and reduced revenue. The impact of this was mitigated through significant growth in performance-based revenues, which increased by 42%, and increased net banking interest, which contributed £63.3 million (2022: £36.9 million). This resulted in a marginal 1% reduction in our net operating revenue to £2,334.4 million (2022: £2,361.4 million).

Our share of profits from joint ventures and associates was £51.1 million (2022: £77.6 million), which was lower in comparison to previous years, principally due to adverse foreign exchange movements and the unfavourable market sentiment in China. While cyclical headwinds challenged short-term performance, the market fundamentals remain strong, and we see significant growth potential over the medium to long term. We made progress against our strategic ambitions in China and launched the first product in our wholly owned Fund Management Company at the end of 2023. Our strategic partnership with Axis gives us access to the high growth potential in the Indian market. Our associate performed well in 2023, contributing £12.6 million to share of profits, up 17% on prior year (2022: £10.8 million).

Despite inflationary pressures on both fixed compensation and on our non-compensation cost base, total operating expenses remained stable year-on-year at £1,758.0 million (2022: £1,752.5 million). Our operating compensation to net operating income ratio was 46% (2022: 45%), balancing strong cost discipline with the need to support our talent.

As a result of our lower revenues and stable costs, we generated an operating profit of £661.0 million (2022: £723.0 million).

Our approach of driving efficiencies in our business to fund investment for growth resulted in restructuring costs of £86.2 million. Consequently, profit before tax was £487.6 million (2022: £586.9 million) and profit after tax was £402.6 million (2022: £486.2 million).

Given the resilient performance of the business, the Board is recommending a final dividend of 15.0 pence per share, bringing the total dividend to 21.5 pence per share.

Wealth Management segment

Wealth Management

Our Wealth Management AUM reached a record high of £110.2 billion (2022: £98.1 billion), supported by strong NNB of £6.6 billion (2022: £5.4 billion), equating to a NNB rate of 6.7% (2022: 5.3%). Net operating revenue increased 7% to £423.2 million (2022: £394.3 million), driven by growth in management fees, NNB and a full year of higher net interest margin (NIM). Higher NIM led to an increase in the net operating revenue margin before performance fees to 41 basis points (2022: 40 basis points), offsetting the impact on margins from increased allocation to cash in portfolios.

Operating profit increased strongly by 16% to £150.5 million (2022: £129.9 million). On the current trajectory we see promising progress towards our target of growing Wealth Management operating profit at a compound annual growth rate of 10% from 2022 to 2025, excluding the effects of markets, FX and acquisitions.

Wealth Management (inc. joint ventures and associates)

AUM in our Schroders Personal Wealth (SPW) joint venture ended the period at £14.3 billion (2022: £13.3 billion).

Wealth Management AUM including SPW increased 12% over 2023, ending the period at £124.5 billion (2022: £111.4 billion). This comprised £81.1 billion of advised AUM, £18.9 billion of platform AUM and £24.5 billion of managed AUM. We delivered a NNB growth rate of 6.2%, within our 5-7% target.

Combined, our Wealth Management joint ventures and associates contributed £2.4 million (2022: £4.0 million) to share of profits.

Asset Management segment

Our Asset Management business combines the foundation of our core investment engine of Public Markets with the strategic growth areas of Solutions and Private Markets.

The segment delivered AUM growth of 3% to £532.2 billion (excluding joint ventures and associates) (2022: £518.4 billion), reflecting our ability to navigate changing market conditions with our diversified business model to deliver value to our clients.

Private Markets

In total, we generated fundraising of £9.3 billion (2022: £15.2 billion). Non-fee earning dry powder stood at £4.0 billion, which will be ready to deploy into market opportunities. This drove NNB of £4.5 billion (2022: £6.6 billion) with positive flows across all four pillars: private equity; private debt; infrastructure and real estate. Flows in our real estate business were particularly strong, at £1.6 billion (2022: £4.8 billion). The net operating revenue contribution increased to £422.8 million (2022: £369.8 million). Despite this, the net operating revenue margin excluding performance fees and carried interest reduced 3 basis points to 57 basis points (2022: 60 basis points), reflecting the lower contribution from real estate transaction fees.

Solutions

Solutions drew impressive net inflows of £12.0 billion (2022: nil), driven by strong flows into our OCIO and LDI businesses. Following the rise in bond yields at the end of 2022, liability values were reduced and we entered 2023 with a lower opening AUM. This resulted in average AUM of £212.1 billion (2022: £225.0 billion). Net operating revenue therefore declined to £268.5 million (2022: £293.6 million). Solutions net operating revenue margin excluding performance fees and carried interest fell by 1 basis point to 12 basis points (2022: 13 basis points).

Public Markets

The appeal of cash as an attractive investment alternative, combined with wider market volatility, led to outflows across the active asset management industry in 2023. In turn, we saw £4.2 billion and £9.2 billion of outflows in our Mutual Funds and Institutional business areas respectively (2022: outflows of £6.3 billion and £7.3 billion). We continued to perform for clients and generated £20.8 million of Institutional performance fees (2022: £32.1 million). Overall, net operating revenue for Mutual Funds and Institutional reduced to £1,219.9 million (2022: £1,303.7 million).

Mutual Fund net operating revenue margin dropped by 2 basis points to 69 basis points (2022: 71 basis points), due to a change in business mix following outflows from higher margin equity products. Meanwhile, Institutional net operating revenue margin excluding performance fees and carried interest increased for the third year in a row to 35 basis points at the end of 2023 (2022: 34 basis points), helping to partly mitigate the impact of the broader headwinds.

Asset Management joint ventures and associates

Our total share of profits from Asset Management joint ventures and associates for 2023 reduced to £48.7 million (2022: £73.6 million), principally due to adverse foreign exchange movements and the unfavourable market sentiment in China. Asset Management joint ventures and associates AUM ended the period at £93.9 billion (2022: £107.7 billion). With the breadth of our licences in China, and our investment in India we are well positioned to benefit from the long-term potential growth in these markets.

Outlook

2023 was characterised by turbulent macroeconomics, volatile markets and heightened geopolitical tension. We anticipate this uncertain operating environment could persist in the near term. However, our strategic pivot to the higher growth and higher longevity areas of Private Markets, Wealth Management and Solutions has provided protection against these challenging operating conditions.

Our strategic choices have enabled us to grow our AUM, deliver positive NNB and generate resilient financial results despite the industry headwinds. Our continued focus on evolving our operating model has allowed us to balance cost discipline with reinvestment in the future capabilities needed for long-term growth, creating value for our clients and shareholders.

For further information, please contact:

Copies of this announcement are available on the Schroders website: www.schroders.com. Peter Harrison, Group Chief Executive, and Richard Oldfield, Chief Financial Officer, are hosting a presentation for the investment community to discuss the Group's full-year results at 8.30 a.m. GMT on Thursday, 29 February 2024. Once registered on https://www.schroders.events/Results2023 a link to the call will be shared via email. A replay will be available from midday on Thursday, 29 February 2024 at www.schroders.com/ir. Please visit https://www.schroders.com/en/investor-relations/ to learn how we handle personal data.

Forward-looking statements

This announcement and the Schroders website may contain forward-looking statements with respect to the financial condition, performance and position, strategy, results of operations and businesses of the Schroders Group. Such statements and forecasts involve risk and uncertainty because they are based on current expectations and assumptions but relate to events and depend upon circumstances in the future; you should not place reliance on them. Without limitation, any statements preceded or followed by or that include the words 'targets', 'plans', 'sees', 'believes', 'expects', 'aims', 'confident', 'will have', 'will be', 'will ensure', 'likely', 'estimates', 'foresee' or 'anticipates' or the negative of these terms or other similar terms are intended to identify such forward-looking statements. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by forward-looking statements and forecasts. Forward-looking statements and forecasts are based on the Directors' current view and information known to them at the date of this statement. The Directors do not make any undertaking to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Nothing in this announcement or in the Annual Report and Accounts or on the Schroders website should be construed as a forecast, estimate or projection of future financial performance.

Additional information

Assets under management (AUM)

¹BoCom WMC subsidiary deconsolidated and reclassified as an associate.

²£0.8 billion Benchmark acquisition.

³Includes currency movements, which decreased AUM by £18.6 billion excl. JVs and Associates and £25.8 billion for the Group total.

Client investment performance

Client investment performance is a measure of how investments are performing relative to a benchmark or other comparator. As an active asset manager, we prioritise consistently delivering positive investment outcomes for our clients which is why our three-year investment performance is a key performance indicator for the Group. It is calculated internally by Schroders to give shareholders and financial analysts general guidance on how our invested assets are performing. The data is aggregated and is intended to provide information for comparison to prior reporting periods only. It is not intended for clients or potential clients investing in our products. All calculations for investment performance are made gross of fees with the exception of those for which the stated comparator is a net of fees competitor ranking. When a product's investment performance is disclosed in product or client documentation it is specific to the strategy or product. Performance will either be shown net of fees at the relevant fund share-class level or it will be shown gross of fees with a fee schedule for the strategy supplied.

The calculation includes applicable assets under management that have a complete track record over the one-year, three-year and five-year reporting periods, respectively. Applicable assets under management do not include our joint ventures and associates and excludes £85.5 billion of assets, principally comprising those managed by third parties or held on an execution-only basis, the majority of assets managed by Schroders Capital Real Estate Hotels, non-discretionary assets and assets held on a custody-only basis as well as Wealth Management platform assets on the Benchmark Fusion platform. Performance is calculated relative to the relevant comparator for each investment strategy as summarised below. These fall into one of four categories, the percentages for each of which refer to the three-year calculation:

Consolidated income statement

for the year ended 31 December 2023

¹Non-controlling interest is presented in the statement of changes in equity.

Consolidated statement of comprehensive income

for the year ended 31 December 2023

¹Non-controlling interest is presented in the statement of changes in equity.

Consolidated statement of financial position

at 31 December 2023

¹Non-controlling interest is presented in the statement of changes in equity.

Consolidated statement of changes in equity

for the year ended 31 December 2023

¹Other comprehensive income reported in the net exchange differences reserve comprises the net foreign exchange loss on the translation of foreign operations net of hedging and any recycling on realisations. Other comprehensive income reported in the profit and loss reserve comprises the post-tax actuarial loss on the Group's retirement benefit schemes and post-tax fair value movements on financial assets at fair value through other comprehensive income.

²Other movements in the profit and loss reserve principally comprise amounts relating to financial liabilities in respect of options to purchase the remaining non-controlling interest in certain subsidiaries (see note 7). Other movements in the non-controlling interest reserve principally comprise the derecognition of BOCOM Wealth Management Company Limited on reclassification from a subsidiary to an associate (see note 8).

for the year ended 31 December 2022

¹Other comprehensive income reported in the net exchange differences reserve comprises the net foreign exchange gain on the translation of foreign operations net of hedging and any recycling on realisations. Other comprehensive income reported in the profit and loss reserve comprises the post-tax actuarial loss on the Group's retirement benefit schemes and post-tax fair value movements on financial assets at fair value through other comprehensive income.

²Other movements principally comprises amounts relating to financial liabilities in respect of options to purchase the remaining non-controlling interest in certain subsidiaries (see note 7).

Consolidated cash flow statement

for the year ended 31 December 2023

¹Includes Wealth Management interest income received of £191.6 million (2022: £75.3 million) and interest paid of £151.6 million (2022: £38.4 million).

²Includes the derecognition of cash on reclassification of BOCOM Wealth Management Company from a subsidiary to an associate (see note 8).

Explanatory notes to the financial statements

1. Presentation of the financial statements

(a) Basis of preparation

The consolidated financial information included in this statement does not constitute the Group's statutory accounts within the meaning of Section 434 of the Companies Act 2006. The statutory accounts for 2022 have been delivered to the Registrar of Companies and the auditor's opinion on those accounts was unqualified and did not contain a statement made under Section 498(2) or Section 498(3) of the Act. An unqualified auditor's opinion has also been issued on the statutory accounts for the year ended 31 December 2023, which will be delivered to the Registrar of Companies in due course.

The consolidated financial statements are prepared in accordance with UK-adopted international accounting standards and in conformity with the requirements of the Companies Act 2006.

(b) Future accounting developments

The Group did not implement the requirements of any standards or interpretations that were in issue but were not required to be adopted by the Group at the year end date. No standards or interpretations have been issued that are expected to have a material impact on the consolidated financial statements.

The OECD's Pillar Two model rules, which will establish a global minimum tax regime, will apply from 2024. This is not expected to have a significant impact on the Group's tax expense.

(c) Going concern

In making an assessment on going concern, the Directors have considered a wide range of information relating to present and future conditions, including future capital requirements, prediction of profitability and cash flows. These assessments showed the Group has sufficient capital and liquidity to support future business requirements and adequate resources to continue as a going concern for at least 12 months following approval of the financial statements.

2. Segmental reporting

(a) Operating segments

The Group has two operating segments: Asset Management and Wealth Management. The Asset Management segment principally comprises investment management including advisory services in respect of equity, fixed income, multi-asset and private assets and alternatives products. The Wealth Management segment principally comprises investment management, wealth planning and financial advice, platform services and banking services.

Segmental information is presented on the same basis as that provided for internal reporting purposes to the Group's chief operating decision maker, the Group Chief Executive.

Operating expenses represent the costs incurred in running the Asset Management and Wealth Management segments and include an allocation of costs between the individual business segments on a basis that aligns the charge with the resources employed by the Group in respect of particular business functions. This allocation provides management with the relevant information as to the business performance to effectively manage and control expenditure. Operating expenses exclude items related to acquisitions, central management activities and certain restructuring costs (see note 3). The reconciliation of operating profit to profit before tax is included on the income statement.

(b) Net operating revenue by segment

(c) Net operating revenue by region based on the location of clients

3. Total expenses

Expenses comprise operating expenses, central costs, acquisition costs and related items and restructuring costs. Operating expenses are those costs incurred through the operating activities of the Group's operating segments; Asset Management and Wealth Management. Central costs are those arising from capital and treasury management activities, corporate development and strategy activities and the costs associated with the governance and corporate management of the Group. Acquisition costs and related items include deal costs associated with corporate transactions and costs associated with the integration of acquired businesses and amortisation of acquired intangible assets. The restructuring costs are one-off in nature and have been incurred in reorganising parts of the group to drive cost efficiencies and allow reinvestment in building the skills needed to support the future growth of the business. They principally comprise compensation-related costs and project expenditure.

The employee benefits expense net of hedging includes £27.9 million (2022: £26.1 million) that is presented within central costs, £19.7 million (2022: £19.7 million) presented within acquisition costs and related items and £61.9 million (2022: nil) presented within restructuring costs.

4. Tax expense

(a) Analysis of tax charge reported in the income statement

(b) Analysis of tax credit reported in other comprehensive income

(c) Analysis of tax (credit)/charge reported in equity

(d) Factors affecting tax charge for the year

The UK rate of corporation tax applicable for 2023 is a blended rate of 23.5% (2022: standard rate of 19%). The tax charge for the year is lower (2022: higher) than a charge based on the UK blended rate. The differences are explained below:

5. Earnings per share

Reconciliation of the figures used in calculating basic and diluted earnings per share:

Earnings per share calculations are based on profit after tax of £402.6 million (2022: £486.2 million) less non?controlling interest earnings of £14.4 million (2022: £6.5 million).

Operating earnings per share calculations are based on operating profit after tax of £533.0 million (2022: £599.4 million) less non-controlling interest operating earnings of £21.3 million (2022: £10.4 million).

6. Dividends

¹Dividends per share have been restated following the simplification of the Company's dual share class structure (see note 13).

Dividends of £13.6 million (2022: £12.6 million) on shares held by employee benefit trusts have been waived. The Board has recommended a 2023 final dividend of 15.0 pence per share (2022: 15.0 pence), amounting to £233.1 million (2022 final dividend: £232.2 million). The dividend will be paid on 2 May 2024 to shareholders on the register at 22 March 2024 and will be accounted for in 2024.

The Group paid £15.5 million of dividends to holders of non-controlling interests in subsidiaries of the Group during 2023 (2022: £9.3 million), resulting in total dividends paid of £348.5 million (2022: £341.4 million).

The Company offers a dividend reinvestment plan (DRIP). The last date for shareholders to elect to participate in the DRIP for the purposes of the 2023 final dividend is 11 April 2024. Further details are available on the Group's website.

7. Fair value measurement disclosures

The Group holds certain assets and liabilities at fair value. Their categorisation within the fair value hierarchy is shown below:

The Group has recognised a net gain on financial instruments at fair value through profit or loss of £19.9 million (2022: loss of £10.9 million). A net loss on financial instruments at fair value through other comprehensive income of £0.1 million (2022: loss of £0.1 million) has been transferred to the income statement.

The fair value of financial assets and liabilities at amortised cost approximates their carrying value. No financial assets or liabilities were transferred between levels during 2023 (2022: none).

Movements in financial assets and liabilities categorised as level 3 during the year were: