GQG Partners Inc. (GQG) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the GQG Partners Incorporated 2024 Half Year Earnings Release Conference Call. [Operator Instructions] This call will contain forward-looking statements, including statements of current intention, opinion and predictions regarding the company's present and future operations, possible future events and future financial prospects. While these statements reflect expectations at the date of this call, they are, by their nature, not certain and are susceptible to change. The company makes no representation, assurance or guarantee as to the accuracy of or likelihood of fulfilling any such forward-looking statements, whether expressed or implied, and except as required by applicable law or the ASX listing rules, disclaims any obligation or undertaking to publicly update such forward-looking statements. Participants recording or transcribing this call may use such recordings or transcripts for their internal business purposes only and are prohibited from making any part of such recordings or transcripts available to the public without prior written permission of the company. I would now like to hand the conference over to Mr. Tim Carver, CEO. Please go ahead.

Thank you, everyone, for joining us. We are pleased to present to you our half year result. I am joined, as always, by my partners, Rajiv Jain, our Chairman and CIO; Mel Zakaluk, our Chief Financial Officer; Steve Ford, our Global Head of Distribution, and this time joining us also is Charles Falck, our Chief Operating Officer. If we go to Slide 2, I'd like to give a brief highlight of the financial result for the period. We had a very strong period. Net flows of over $11 billion in the first half of the year led to funds under management of over $155 billion at the end of the period. Our net revenue was $363 million, roughly 53% higher than the year ago period. Our net operating income was $273 million, an increase of nearly 55% from the prior period. The Board has declared a second quarter dividend of USD 0.0335 per share, as always, a 90% payout ratio of our distributable earnings. On Slide 3, we will start where we always should start. As you know, I believe this business begins and ends with investment performance. The good news is that in the short -- over the 1-year period, in the short term, our investment performance has been exceptional. Having said that, I'd caution everybody that we should not focus on short-term performance, but rather on our longer-term performance. And the good news is, across all 4 of our core strategies, we have substantial outperformance with lower volatility on a 1-year, 3-year, 5-year and since inception basis. As you know, I also like to talk about our operational value added. So as we look at Slide 4, you'll see what does it look like, what have we delivered and what you should hold me and our team accountable to, what have we delivered relative to a theoretical passive GTG. Here, you see that, as I mentioned, we've added over $11 billion of net flows in this period. And on top of that, the investment team has added excess return relative to the benchmark of nearly $15 billion. Collectively, that takes us to nearly $26 billion additional assets under management as a result of the hard work and excellent execution from the team. On top of market returns of nearly $10 billion, you'll see it in the first half, the firm has performed exceptionally well. So as we go to Slide 5, I'd like to talk about a few of the business highlights from the period. As I mentioned, all strategies have outperformed their respective benchmarks on a 3- and 5-year basis. That's taken us now to, on a 5-year basis, top decile performance in terms of alpha and Sharpe ratio across all 4 of our primary strategies. That's resulted in 10 of 12 of our funds now carrying Morningstar Gold Medal ratings. And this, of course, is very important as we build out our distribution in retail, in particular, where we're seeing very strong flows across the board. Our distribution team has continued to make strong investments over the past 8 years, and we're seeing some of the benefits of those investments here in this period. We are a top 10 mutual fund family in the U.S. ranked by net flows. Our Australian global equity net fund flows are top in that market and our UCITS complex has now surpassed $8 billion. Our head count has grown to 213 people in total at the end of the period. And as we've talked about in the past, we believe that our core infrastructure investment in the business is starting to wane. And so the increased head count here is coming from discrete investments we're making, notably in the private capital business and in Abu Dhabi, but also continued investment in sales where we expect to continue to see strong returns from the investments we're making in the team. Strategically, during the period, we closed on the acquisition of 3 boutique interests from Pacific Current Group, a deal that I'm thrilled with, that we worked very hard on and which will be the basis for our private markets business. And we are now operational in Abu Dhabi after a long and successful investment in that region. We now have a dozen employees as of today and regulatory authority and space to operate from. If we go to Slide 6, I'd like to talk briefly about the strategic initiative we made to invest in private markets. As I've said before, my expectation is that in this period and in the near term, our investment in the private markets business will not be material as it pertains to our financial statements. Having said that, I believe strategically over the long run, it is quite material. I'm very excited that we were able to accomplish this transaction and that we've been able to attract such a strong team to go build out a full-blown private markets business. I think it's important for everybody to understand strategically why it is that we wanted to enter this business. Now, we always are looking for what we call the sunrise parts of the market, where within the asset management business, are we seeing growth, where are we seeing talent flow to, and where do we, therefore, want to position our own business? Private markets clearly embody this. And in doing the transaction that we did with PAC, we were able to bring on board not only 3 great investment boutiques, but also a team that we know quite well, and that we know has among the longest tenure and deepest track record in the industry. We also believe over time that our distribution infrastructure that we continue to invest in can be leveraged to distribute high-quality products that our current investors and future potential investors will find value-added in their portfolios. Fundamentally, we think that these businesses are attractive businesses to invest in. We think the closed-end managers can provide relatively predictable contractual management fees and can scale their businesses. And we believe that our team that we've brought on and that we will continue to build, as I said, is one of the most experienced in the market and can drive substantial growth in that business over the longer term. With that, I'd like to hand over to Charles Falck, who will talk a little bit about Abu Dhabi, but frame it really in the broader context of what we're trying to achieve operationally, how we think about investing in our infrastructure, and how we think about building a global, redundant, robust infrastructure in our business. Charles?

Thank you, Tim. Yes, I'd like to spend a couple of minutes on our operating model and describe to you how the establishment of the subsidiary in Abu Dhabi that Tim mentioned forms an integral part of that sort of strategic initiative. On Page 7, you'll see a couple of comments relating to that. As you would expect, our operating model supports a global investment practice as well as client-facing functions and corporate units. Such an operating model is designed to be robust, scalable and efficient. As we previously mentioned, there were 3 primary drivers illustrated at the top of Page 7 that drove us towards establishing a regulated entity and a wholly-owned subsidiary in Abu Dhabi. Those are acquiring talent, building and developing regional and local businesses and then leveraging operational efficiencies. Through June 30, we've been able to execute on all of these. And starting on the bottom left, as Tim mentioned, we're now at 12 full-time equivalents. At June 30, we were at 8. Our experience in hiring locally has been extremely positive. We've been able to hire a number of highly-qualified colleagues from diverse experiences and backgrounds and that cover a variety of roles and functions. Additionally, going forward, we're planning on expanding our asset management associate training program to include the Abu Dhabi location. In the middle of the page, current business and prospects. We've had existing relationships with investors and have been able to further expand on those, as well as initiate new relationships with both investors and potential distribution partners, which has gone well. And then that leads me to the current operations. Our functional capabilities in Abu Dhabi really span the entire value chain, starting with research and portfolio management going across to trading and portfolio implementation, operations and corporate functions, including sales and client services. If you take these 3 elements together, I think they provide a good illustration of how expanding to Abu Dhabi enhanced our operating model, allowed us to operate globally and really evolve towards a follow-the-sun model. With that, I'll hand it over to Mel Zakaluk for her comments on the half year financials.

Thanks, Charles. Before we jump into the numbers, as Tim discussed, we launched our PCS business on 17 May 2024 at the closing of the transaction, where the PCS Master Fund purchased 3 boutique interests from Pacific Current and Northern Lights. The purchase was funded by a term loan from HSBC that is guaranteed by various GQG entities. U.S. GAAP accounting rules have required us to consolidate the fund within the GQG Group for the 2024 half year period. As we review those financials, you will see the impact from the consolidation of the PCS Master Fund on our operating income is not material. There is a notable impact to the balance sheet as the assets were grossed up to reflect the fair market value of the PCS Master Fund assets and the liabilities to include the term loan to fund the transaction. While the accounting rules around this topic are complex, we expect the PCS Master Fund to be a stand-alone entity when unaffiliated clients or investors contribute sufficient capital to the fund in the first close. I'll be presenting today consolidated and deconsolidated financials so that we can review the impact. Now let's take a look at our results for the first half of the year. Slide 9, please. We are pleased with our financial results for the first half of 2024 and have good momentum heading into the second half of the year. The global equity markets were broadly positive during the first 6 months of 2024, as they were in the first half of 2023. GQG's excess return was meaningfully higher for 3 of the 4 flagship investment strategies during the period, significantly contributing to FUM growth, along with new net asset flows of $11.1 billion. New net asset flows were 79% higher than the first half of 2023. Higher average FUM resulted in more than a 50% increase in net revenue, operating income and net income after tax. Looking at the bar chart on the left-hand side, our operating margin for the 6 months ended 30 June 2024 was 75.2%, a slight increase from the first half of 2023, even as we continue to invest in the business. We note that net revenue and operating income have each grown over the past 3-, 6-month periods at a compounded annual growth rate of 23.8% and 24.4%, respectively. Our declared dividend per share on earnings during the period increased 53.7% year-over-year. The dividend declared today of USD 0.0335 per share is based on the revised dividend policy approved by the Board of Directors and released today. The revised dividend policy updates the calculation of distributable earnings by adjusting GQG's consolidated net income after tax to remove the impact of unrealized gains and losses on investments in foreign currency, which have not been meaningful in the past but are expected to increase. We determined it is appropriate to exclude them going forward as they do not have an impact on free cash flow until those gains or losses are realized. Slide 10, please. We continue to have what we think is a high-quality revenue profile due to the concentration of management fees versus performance fees and the competitive pricing of our products. Management fees represented 94.6% of our net revenue in the first half of 2024. We believe this higher proportion of management fees provides a foundation for stable quality earnings, particularly during the periods of equity market volatility. Our average management fee during the first half of 2024 was 49.3 basis points, up from 48.3 basis points for the first half of 2023. Net revenue increased 53.1% and operating expenses increased 48.1% as compared to the prior year period. We're pleased to see our prior investments in the firm fueling revenue growth. More than half of the expense growth from the half year 2023 to half year 2024 is directly related to costs that have been driven by growth in fund, new sales, investment performance and strategic investments, namely the launch of PCS and expanding our global footprint into the UAE with our new office in Abu Dhabi. Taking a closer look at our expenses, compensation and benefits as a percentage of total operating expenses has remained consistent year-over-year, 57% of the first half of 2024 versus 56% a year ago. As expected in a human capital business, we believe the greatest investments we can make are in our current team and in attracting other talented people as needed to operate the business and serve our clients. Compensation expense increased as a result of increased sales commissions related to higher new sales, the impact of strong investment returns on the deferred compensation program and new employees. GQG is focused on creating a firm that endures beyond its founders. Achieving this goal is reliant on creating a resilient organization and building in succession. Many of the resources added during the period are in pursuit of this goal and are tilted toward more junior roles, resulting in a lower average cost per head count than in previous periods. As Steve will further discuss, our wholesale business continues to grow around the world, reflecting our investments in the channel. As third-party distribution, servicing and related fees, our primary wholesale FUM-based business, the growth in this line item was driven by the increase of average FUM and fund vehicles where these fees are incurred. Comparing general and administrative costs for the 6 months ended 30 June 2024 to the same period in 2023, expenses increased by $6.6 million. In addition to the increase of the middle office expense driven by FUM growth, cost increase related to PCS Master Fund asset transition and higher professional consulting fees. As you would expect, the largest single expense is taxes. Our U.S. GAAP effective tax rate decreased from 27.44% to 27.04% due to tax changes in various U.S. states. Generally, the driver in changing tax rates are U.S. states where each state has different rules on how income is apportioned and unique tax rates. Slide 11, please. On this slide, we have an illustration of the impact of the PCS Master Fund consolidation on the statement of operations. In the first column on the left, we have GQG Group prior to the consolidation, followed by a column with the PCS Master Fund impact to arrive at the total consolidated result of our U.S. GAAP financial statements. The total impact, a $3.4 million loss, is primarily professional fees associated with the establishment of the fund, interest expense and transaction costs that were capitalized to the cost of the boutique interests resulting in an unrealized loss. While the accounting rules on these areas are complex, when unaffiliated investors contribute sufficient capital to close the fund, we expect GQG will deconsolidate the fund. Upon deconsolidation of the fund, we expect all operating expenses of the fund, including interest expense, should no longer be a part of our consolidated financial results. Slide 12, please. GQG's financial condition without the U.S. GAAP, but without the U.S. GAAP required consolidation of the PCS Master Fund would be very similar to other periods with no debt and the primary use of cash for working capital and dividend payments. Growth in cash and accounts receivable are aligned with growth in revenue and excluding the impact of the PCS transaction, liabilities increase from seasonal timing of the payment of annual bonuses and service provider expenses. The significant changes in the balance sheet over the period are generally attributable to the consolidation of the PCS Master Fund. Let's go to the illustration of the consolidated impact. Slide 13, please. On this slide, we have an illustration of the impact of the PCS Master Fund consolidation on the statement of financial condition. Again, in the first column on the left, we have GQG Group prior to the consolidation of PCS Master Fund, followed by a column with the impact of the PCS Master Fund and intercompany eliminations to arrive at the total consolidated result of our U.S. GAAP financial statements. The most significant impact is the inclusion of the boutique interest at fair market value in total assets and the correlated short-term debt obligation. The fair market value includes additional payments to the boutique Avante, part of the contract terms. These payments are the majority of the accounts payable balance. Slide 14, please. As noted on the balance sheet, the primary use of cash, excluding PCS Master Fund consolidation continue to be working capital and dividends. GQG has remained committed to distributing 90% of distributable earnings, resulting in $167.8 million in dividends paid during the period, a 46.4% growth from the half year 2023. Now, Steve will give our performance and distribution update.

Thank you, Mel. I appreciate the opportunity to address all of you as shareholders once again. And as Tim and Mel both alluded to, I get to bring quite good news. And if we want them to start with Slide 16, looking at performance on both the near-term and long-term basis is incredibly strong. And as Tim noted, look, we would never want to tell anyone to extrapolate out near-term performance as long-term performance. However, when you're in the business that I am of trying to grow the top line, it is quite helpful to have both. And right now, you see us really in the top decile across all 4 of our core strategies on both the near term and the long term, which is a very strong statement to our performance right now. If we move to Slide 17, as you've heard me speak probably before, it's much more sophisticated investor that we deal with that wants to look at performance, not sheerly on an absolute or basic relative basis. They want to understand the persistence of that performance. And Slide 17 shows that across these 4 strategies. Basically, you're looking at every rolling 5-year period that you could have owned one of our strategies and 100% of those periods across all 4 strategies, we outperformed relevant benchmarks and relevant peer groups. And so what I think that helps with in a period like we've seen over the last 12 months, and in particular the first half, is it helps new dollars come in without the fear of really kind of top ticking or chasing the hot dot, meaning that our style is adaptable and such, and that it's not so exposed to -- or persistently exposed to factors where people get worried about mean reversion of chasing hot dots. And so we show this as one of the real advantages to our return stream over time, not just simply outperforming. If we move to Slide 18. Beyond persistence, I think people care about how much risk you're taking to achieve those results. And here, of course, the picture of returns relative to risk, you want to be in the upper left quadrant, which all 4 of our strategies are. And these risk-adjusted returns are ultimately always at the top of the tables for what investors search for quantitatively when they're trying to find a new investment strategy. And Slide 19, it is an important translation of that risk-adjusted return, which is the star ratings by Morningstar and then the equivalence of the Australian ratings agencies. And those star ratings are very important to our wholesale, retail business that Tim and Mel both have alluded to the strength in and then I'll now address in more detail as we move into the distribution section of the presentation. So Slide 20 gives you the current breakdown of assets at the firm across strategies, channels and concentration levels, and shows the net flow by region, just over $11 billion, as both noted before, and how that breaks down. Now, we've had some questions, comments in the past about the delta between Americas and other regions. And I think that it's important to keep in context the size and depth of the U.S. market, our home market, which we've been in since day 1 relative to the others, because I think what is happening is it's actually masking quite a bit of strength in the other regions that we're very excited about. So let's move to Slide 21. You can see that breakdown across the channels in the time periods, half-over-year, year-over-year, et cetera. And this has been a very strong half 1 where we've already exceeded our net flow numbers from last year. And that has been on the back of the wholesale channel and the sub-advised channel too. But the sub-advised component is driven by the same in investors, the same in markets, in the wholesale side. So it's really strength across both of those channels for us. And that has been a significant investment over 8 years, across geographies, across channels, to create these relationships, to create the opportunities and availability for these products, and to put us in a position that as our track records build, as our brand builds, and as our relationships grow, we're in a position to capitalize on the strength of our investment team. And so I see continued strength there moving forward, barring any kind of broader market upset or anything of the like. And we've done that really on the back of increased platform availability and also an expanded offering on strategic platforms in the U.S. with a retail SMA offering that allows us to broaden our availability on platforms as well as get follow-on business in the mutual funds that are available on those platforms. Moving to Slide 22. I won't belabor the points around what we've done in U.S. wholesale distribution. However, I'll note that the result continues. So again, for first half, we're a top 10 net mutual fund flow company. And if you look at Goldman Sachs, which is in the #4 spot, that is a significant partner of GQG, and a large portion of the results for Goldman Sachs and net flow business actually come from the GQG relationship. On 23, I want to spend a little bit more time on our distribution success outside of the U.S. market and look at wholesale success across our UCITS platform and our Australian funds platform. In total, this is $1 billion in net flow for the period, which is a very strong result, actually a record for the firm and I think portends good things to come, especially if you look at the growth rate off the bottom of last year. And so it's, to me, encouraging to see the correlation between what we're doing in the U.S. market and the strength that we have there are translating into other markets. And you've seen us add over 60 new clients in the UCITS platform in half 1, many of which should be able to create new net flow opportunities as we move forward. And of course, in our Australian business, we've continued to make significant investments and now see the results of that. And we are -- actually, if you look over the last 3 years, the #1 net flow gainer in the global equity category in Australia. So I'll finish up with what I think is just an important validation point on Slide 24, which is looking at the largest database that investors have access to, to review investment product. And so what we want to see is our ability to drive interest in our strategies, people reviewing our profile, people reviewing our data. And when you combine that with very good performance, which we talked about earlier, I think it is a very good leading indicator for fundraising success. So with that, I'm going to pause. I'm going to turn it over to Rajiv Jain, our Chairman and Chief Investment Officer, to talk a little bit about his views on the current market environment.

Thanks, Steve, and thanks, everybody, for joining and for all the support. So, as Steve said, the performance has been reasonable. Looking at the choppiness that we've seen over the last 1.5 years, as you know, 1 year is a kind of arbitrary period in market cycles. But I think the important update would be that if you look at last 3 years, what we have seen is almost a multiple cycle sort of being compressed in different ways. You saw a big tech boom in -- from basically 2019 to 2021 and then a fairly significant inflation and then energy cycle where tech came down pretty sharply and then a meaningful recovery, pretty much driven, in our opinion, solely by AI. So sitting here and now, as you know, we've been fortunate in terms of how we've performed. But I feel that it's important to mention that if you look at the position today, we are generally underweight technology, because sometimes the perception might be that you're riding one or the other cycle, but we tend to be very valuation conscious in terms of how things are and obviously where the corporate earnings are, which led to our cutting back on China, was corporate earnings, not [ to see ] cheap valuations. Japan, we've been significantly underweight in almost all our books. And today tech is almost all -- almost all the products we are underweight tech, but there's so many other areas that have come up. So we feel that we just like to sort of get good corporate earnings and at reasonable valuations, and we need both, which allows us to navigate better. There obviously no guarantees how things will transpire. But sitting here and now, I feel that this is not the time to be going -- being as aggressive. We worked very well because the corporate earnings strong -- was very strong, but the valuation where we are and some of the tech names, the semiconductor and so on, so forth, we've generally been sort of -- we've trimmed at the margin. So we feel good where we are positioned as things are. But obviously, as I like to say, we reserve the right to change your mind. Tim?

Great. Thanks, Rajiv, and thanks everybody. I think now we can open it up to Q&A.

[Operator Instructions] Your first question comes from Scott Murdoch with Morgans.

Tim, can I just start with the private capital business? Can you just, I guess, give us a little bit more information on the road map for this strategy and just talk to what the next step is in terms of fundraising there and then deployment of those funds and what opportunities you're seeing. As you said, it's not moving the needle yet. So just interested in your expectations and time frames around this strategy.

Yes. Thanks, Scott. Look, so I think that in the near term, as you know, we don't provide real guidance here, but I'm reasonably confident that we will have success in raising third-party capital in the relative near term. But I would say that whatever we raise will be immaterial to the overall business. But I think it will be material to the PCS business. And so I'm very confident in the quality of the work that's being done. Of course, once capital is raised, there's typically sort of a 3- to 5-year window to put funds to work, and then you're back in market raising future funds after that. So I think that there are -- there will be real opportunities to continue to scale that business. But again, I just -- focus is on more of an intermediate-term perspective for it to really be impactful to our P&L.

Okay. And just, I guess, a similar question, my second question around the similar strategic avenue. I mean, I guess you've talked about leveraging your distribution capability, but PCS is this longer term, call it, 5- to 10-year growth strategy, which doesn't really move the needle on leveraging that distribution. So just interested in your current position on more direct ownership, a meaningful stake in something that you can leverage directly and, I guess, on a quicker time frame?

Yes. So first, I actually do think that we can have a fairly meaningful impact on the distribution side because we can -- not only will we raise money for the third-party capital for the activities of the PCS team, but we will have the opportunity, I believe, over time to also raise funds for some of the underlying boutiques that we -- that team invests in. And we have some pretty creative ideas and innovative ideas about how we might do that and how we might go to market. We'll talk about that in the future. But I'm reasonably optimistic that in a -- take a 3- to 5-year view, we can actually have meaningful fundraisers around the entire platform, including the underlying boutiques. Now in terms of trying to do acquisitions and bring like truly on balance sheet, Scott, as you've heard me say before, I'm pretty negative on the idea that we're going to actually go out there and do an acquisition that we would really bring in-house. I always say never say never, but I'm -- my bias is pretty strongly against that. I've seen very few full on acquisitions work out. So I don't anticipate that. I don't think we -- shareholders should anticipate that we would be doing that anytime in the near term.

Your next question comes from Nicholas McGarrigle with Barrenjoey.

I just had one around the OpEx base. Staff costs were up considerably. Can you talk through the quantum or give us a sense of what were the kind of -- which were the biggest contributors between kind of sales linked bonuses or investment performance linked bonuses versus maybe some start-up PCS costs in that staff line because it feels like there was -- the percentage of revenue was maintained. But I think we might have expected to see some leverage through that line as you grow.

Yes. Nick, thank you. So as you know, we don't provide really granular detail on that. But what I can say more generally is it is all of those -- all of those factors. So of course, there's some element where you have sales commissions also as we've talked about in the past, part of the way we manage our comp expenses, in banner years people get good bonuses and in years where they don't perform as well, they don't get as strong bonuses. It's very much that underpins the performance orientation that we want, the culture that we want in the firm. So of course, we've had very strong investment performance and very strong business performance. And as a result, you're seeing some of the sort of in-line growth that you described. But there is very meaningful investment in both PCS and in Abu Dhabi, where I'd say, in terms of head count expansion, fully 50-plus percent of the head count expansion would be between Abu Dhabi, PCS growth and sales-related activities. And so you're really talking about investments made in the future. And keep in mind that, of course, we can't predict the timing of when those types of investments will come. But they're not going to come every year. So -- and my expectation is all of those should yield, just like we've seen before, where we've added, where we've made investments in distribution. Again, over an intermediate period, we've seen returns on those investments. And we don't have to continue to make those investments if they don't -- if we're wrong about the returns. But we're pretty confident that the investments we've made in this period will yield solid returns to the firm over the intermediate term.

All right. And just the second question is around performance fees. You've had a good outcome there for the half year, 10% alpha across most strategies. I just wanted to get a bit more detail on kind of the structure of performance fees at a general level. Obviously, no specifics, but just other caps on total MERs? Are there largely crystallizations at December? And what's the typical kind of percentage alpha to 10% or 20% or some kind of guide on what the percentage performance is as well, if that's okay.

Yes, thanks. So look, I don't want to get into the details of that for competitive reasons. I think it's important that we preserve those -- the details of those. But what I would say is there's no meaningful expansion in the number of clients that have had performance fees. And again, just to reiterate, in Australia, performance fees are much more common than they are in the rest of the world. So you don't typically see, for example, in retail funds, any performance fee in the U.S. In fact, they're forbidden in 40 Act funds. So the reality is that my expectation is we continue to see kind of single-digit percentages of revenue and performance fees. Of course, we had really fantastic investment performance, which has led to the stronger-than-expected performance fees for this period.

Your next question comes from Brendan Carrig with Macquarie.

Look, maybe I just wanted to follow up to Nick's question a little bit more there. Just in terms of the OpEx, is there a direct linkage with the performance fees? Or is there a bit of a lag in terms of when bonuses need to be accrued and/or is the performance fees not all paid in the half and there's a rolling performance fee period for some of them and so there's sometimes going to be a bit of a mismatch in terms of the comp benefit relative to that performance fee uptick?

Brendan, so -- no, we don't -- we do not link directly any compensation to performance fees. So again, unlike maybe a smaller hedge fund-oriented type of business where principals might have a direct linkage or a direct share and carried interest. That's not how we do compensation here. We do compensation on an annual basis with structured KPIs, and we look at -- and sort of 360 reviews and ratings and the like, so that every year we get -- you should look at how is the business performing and then how is each individual performing within the context of the business. And that will drive their individual bonus or incentive sort of income. So the one place where there is a tighter linkage is on the sales front, unrelated to performance fees, but the sales team has a much stronger linkage to growth to actual sales with respect to their incentive compensation.

Yes. Okay. So that would be linked to the flows. That makes sense. And then my second question. I think you just mentioned earlier that the PCS, some of those costs are sort of employee and compensation. But in Slide 11, it looks like those PCS Master Fund costs are just general and administrative. But is that just head count relating to general and administrative that you were referring to as priorities on Slide 11 with the costs related to PCS?

No. So 2 different comments. What I was commenting on was the increase in head count. So if you look at -- and if I said costs, I apologize. I meant the number of bodies, if you look at the increase in head count, circa 50% has been related to PCS to Abu Dhabi and to sales. And so the investments we're making in people that will ultimately drive the personnel expense line are really -- we think of them as investments that should yield a return, worked for us historically and where we can make changes if they aren't yielding. With respect to the actual G&A line, that -- Mel can speak more specifically to that, but that has to do with the expenses related to the actual transaction, advisory fees and the like.

And just -- Brendan, I just want to point out that the consolidation is of the fund and it's not a PCS entity. A PCS entity is in our consolidated group and would stay in our consolidated group. But what we needed to consolidate for U.S. GAAP purposes is the fund and the fund doesn't have any employees. So those expenses -- that's why you don't see anything in the comp line relative to the impact of the consolidation of the fund.

Your next question comes from Nicolas Burgess with Ord Minnett.

Tim and team, my first question is just on flows. You've mentioned a couple of times over the last few periods that rebalancing and redemption activity has impacted the institutional channel. We can see some of that evidence on Slide 21. Are you able to give us a bit more color or some of the reasons behind that? How general is it? Is it specific clients that we're talking about here, and, I guess, do you expect it to persist?

Yes. It's a great question. Thanks, Nick. So, by and large, the -- any outflows that we've had have been idiosyncratic and client specific in the institutional space. Having said that, there's been enough that you can say that the -- we see the institutional business increasingly focused on things like high customization. And so we are very careful about how we think about building that institutional business to make sure that our business scales. But no, I wouldn't extrapolate out to any general trends. Of course, we did, as you recall, a couple of years ago, have the significant trend in the U.K., but that, I believe is all behind us now. So any institutional losses that we're seeing, I think, really are largely idiosyncratic.

The other thing I would actually want to add -- add to that, sorry -- the other thing I want to add to that is that unlike most of the long-only or managers, we feel that at times we may need to actually resign from some of select mandates because there's a disconnect. We don't want to grow for the sake of growing. And we feel that longer term it will be detrimental in terms of how things are. So you will see from time to time where we actually resign. Now just to refresh, 4, 5 years ago, we resigned from sort of a mid-single-digit percentage of our business because we thought there was a disconnect. So I think we feel that's a healthy part of longer-term growth, rather than simply growing for the sake of growth, especially if you feel there's a disconnect in terms of what the clients' expectations are or what have you.

Yes, I'll just add to that, just to frame it, so everybody remembers. What we've said all along is our belief is this -- particularly at this scale, the strongest driver of long-term growth should be alpha. So if we can drive alpha, that will have the biggest impact on our revenue growth, also have biggest impact on our margins. And so if we view that we are -- that a client has demands on the business that will either compromise the alpha or be operationally very hard, we'll think very hard about taking on that business.

Yes. Okay. So my second question is sort of related to that. Given the strong flows that you've had over the last few years and the group at USD 155 billion FUM, can you help us out with what you think capacity is of current strategies, given the significant growth you've experienced?

Yes. Again, we don't get into specific capacity numbers for a variety of reasons, but we're very confident sitting where we sit today that we have ample capacity and ample ability to move. And I think you can see just in the way we've been able to perform, Rajiv talked about this sort of past 1.5 years, in very, very different environments we've moved the portfolio around. We continue -- if you look at the overall factor exposure, sector exposure, you'll see that we continue to move the portfolios as much as we've done historically. And that won't always be the case because some market environments won't call for it. But we see no impact on our ability to execute today at the capacity we're at or anywhere in the near future.

I think the other thing I'd like to add is that if you look at the context of some of the markets we're operating in, U.S. obviously is -- I mean, the largest market, but very deep and liquid. But even if you look at some of the other markets, especially emerging markets, where I think this kind of gets a little bit lost is these markets are large. I mean, if you look at, for example, India, it's a $5 trillion market cap. Japan is $8 trillion. China is $8 trillion. So most of people don't appreciate that India is almost 2x -- more than 2x of Germany now, right? So some of these are very large, deep markets. And we feel we have an edge in terms of our ability to source liquidity and place liquidity for somebody else. And we've done that in the last few years in various markets, not just India, but also in Middle East and Latin America.

Your next question comes from Shaun Ler with Morningstar.

Just got 2 quick ones. My first question is, early this year, when your net flows were increasing above the usual rate, you did note to not project this into the future. But what we had after this was even stronger flows. So I'm just curious, how much of these are new market share wins that you previously did not expect and who are you winning share from? And how much of it can be due to pent-up demand since markets were a bit depressed in 2022 and 2023? And my second question, I just would like to circle back on PCS. Can I just get some clarification, if you could get further pointers on how to model this growth in the medium term, like do we get more frequent fund flow data? Or what's the target ROI? Or should we just go back to when [ they were still this back ] and try to model around rate there?

Shaun, I'm going to ask you to repeat the -- let me answer the second question, but I'll ask you to repeat the first question because it was a little bit garbled on my end. I didn't quite hear it. But on the second question we don't give guidance as to how to model specific business lines. All I can say is I'm reasonably confident that it will not have a material impact on the overall group over, if you're talking about a 3-year period. I don't think it should be material to the overall business.

All right.

Could you reask the first question?

Yes. So I guess my question was at the start of the year, your flows were quite strong, and I think there were statements on not to project this run rate into the future. But if we look at recent months, your flows are stronger than ever. So I'm just curious how much of these are new market share wins that you did not expect and who are you winning share from? Or how much of it is due to simply pent-up demand from clients now putting in money when they were not putting in money in 2022 and 2023?

Yes. It's a fantastic question and one that's very hard to answer with any precision. My best guess and based on my experience is that it's the latter that you saw a lot of clients sitting on the sideline and they have come in after 2022, '23 into our funds. I think you couple that with we now have longer track records in all the platforms, UCITS platform, Australia, U.S. and those longer track records are sometimes screens that people use to potentially invest. And so I think we are now available in more platforms and for more investors who require longer track records. And then I think the performance continues to be strong and so we just continue to take a little bit of share. So a little bit of all 3. But if I had to pick one that was more impactful, I think it would be that probably there -- we know that there were a lot of client dollars on the sideline. By the way, they remain continue to be client dollars on the sidelines as well so that one could extrapolate that, I suppose. But it's very hard -- it's very hard to predict in the future. What I'd say is I can look back over our history and we've very consistently been able to deliver $8 billion to $10 billion a year. And I think that with our -- with the breadth of our distribution, provided we have strong investment returns relative to the market and relative to our peer groups. I think that our distribution capabilities should be able to continue to drive that. But I -- it's hard to predict anything more than that.

[Operator Instructions] Your next question is a follow-up from Nicholas McGarrigle with Barrenjoey.

Just building on some of the questions around PCS. There was -- the $3.4 million impact was from the Master Fund. Can you give us a sense of the costs in establishing that business that are borne out in that table? Is it in the order of a couple of million dollars of additional cost above the [ $3 million ]?

Mel, do you want to take that?

Sure. So if you look at the P&L consolidated slide, I don't have the slides right in front of me, what number that is. However, if you take a look at the operating income, you'll see there's some G&A expense. Then there were about $1.5 million of costs associated with purchasing the boutique. So that's due diligence, et cetera. And that under the transaction that we went through, has to be capitalized to the cost. So that was expense, but shows up in there as capitalized costs resulting in the unrealized loss. And then the line below that is interest expense. So those are the expenses associated with the fund. We're not providing detailed numbers on expenses that were associated prior to those activities, such as the establishment of the other organizational entities, et cetera. We're not providing detail on that. But that's the explanation on those expenses you see associated with the fund.

Yes. And you I think Rajiv touched on it as well walking away from business that's not economic. I mean, as you approach capacity in some of the funds, do you start to think about having those conversations about what you can -- where you can earn the highest yield on that scarce capacity?

Yes. So actually, it is not related to our capacity constraints or something because if you look at the market cap spectrum that we operate, we tend to operate in the top decile basically from a market cap perspective. Our median market cap tends to be a multiple of any relevant index market cap, right? So it is not capacity-related. It's much more of sort of disconnect. Maybe they are changing -- they are trying to changes their guidelines. Maybe the expectation is different in terms of ESG constraints and what have you. And we -- by the way, we -- and this is not just now, by the way. As I said, we just walked away from almost mid-single digit of our total AUM a few years ago, and we were tiny compared to where we are now, I mean, 5 years ago. So it is much more -- we feel that it should be relationship where we are on the same page in terms of how we like to operate. It has nothing to do with capacity, because, as I said, I mean, these are very large markets that we operate. We don't run a SMID fund or something. These are mega cap type products, which allows us to move around and generate alpha. That's the objective. So it has nothing to do with that. It's much more around clients' expectation can change. And our view is we actively want to explore at least a few relationships every year where we feel there's disconnect. And we have offered to resign, by the way. Even now we have discussion with a few clients where we've offered to resign. And you will see that impact, by the way, in some of these future months of a little lumpiness because of that. And we feel that actually makes the business healthy, not -- and most of managers simply are not willing to do that because they care about short term. And while we feel the longer term, we want to do anything that sort of consolidates to improve our business. Thank you. There are no further questions at this time. I'll now hand back to Mr. Tim Carver for closing remarks.

Great. Well, thank you, everybody, for joining us. We are -- as we always say, we are deeply aligned with you as shareholders. We're deeply aligned with our clients as investors, and we appreciate your support, and we will continue to do everything we can to drive the business forward. So, thank you and we'll talk soon.