Jupiter Fund Management Plc (JUP) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Jupiter 2021 Interim Results Presentation. My name is Hailey, and I will be the operator for your call this morning. [Operator Instructions] And I will now hand you over to Andrew Formica, Chief Executive Officer. Please go ahead.

Thank you. Good morning, everyone, and welcome to Jupiter's First Half 2021 Results Presentation. I'm Andrew Formica, Chief Executive; and joining me on today's call is Wayne Mepham, our Chief Financial Officer. I'm sorry of having to put you through the pain of another webcast. I hope by the time of our full year results next year, we'll be in a position again to meet face-to-face. I'd like to start by focusing on some of our key numbers for the period. We've been able to deliver sizable increases in revenue, profits and assets under management, supported by the acquisition of Merian Global Investors, which we completed this time last year. Taking a closer look at the numbers, net revenues rose 38% to GBP 224 million. Underlying profits before tax also jumped 38% to just over GBP 78 million, and underlying earnings per share, meanwhile, increased 15% to GBP 0.115 a share. The smaller percentage drive is linked to the issuance of shares related to the Merian acquisition. In addition, the Board has declared an ordinary dividend of 7.9p a share, in line with our distribution in the same period last year. Assets under management, boosted by our acquisition of Merian, rose 54% to a record of just over GBP 60 billion. We continue to deliver the investment performance our clients expect of us with 69% of our assets under management in funds outperforming over 3 years relative to their peer group, broadly in line with where we were at the end of 2020. One area where I would have liked to have reported better progress is on our net outflow position. In the last 6 months, we saw a GBP 2.3 billion in net outflows. The headline figure is disappointing, and I'll be talking about this in more detail later on. Investment performance is the most critical deliverable of our business. We now have clients take a medium- to long-term investment horizon, and these are the numbers they focus on when judging our success. Whether it's over 3 or 5 years, our fund managers continue to deliver for our clients, demonstrating why we, at Jupiter, continue to focus on high conviction active asset management. We are passionate about how we believe truly active management can make a material improvement on the financial position of our clients. In this slide, I'd like to focus on some of our larger strategies. These are all of our funds and assets under management over GBP 1 billion. Firstly, as a result of the Merian acquisition, we are now a more diversified business. As you can see, there is a consistent pattern of by and large, very good returns over both 3 and 5 years. Where there is weakness, you'll see it concentrated in our value range in funds like U.K. Special Sits and Jupiter Income Trust. These funds have been delivering very good performance over the last year as value investing has come back in favor, leading to good inflows in 2020, which will continue in the first half of 2021. I'd also like to mention the Chrysalis Investment Trust. It's not included here as it's not a mutual fund and doesn't have a formal peer group, but it's a trust that's done incredibly well for our clients. If we compare its performance against all other investment trusts, whatever the sector, Chrysalis' performance is third percentile since inception. It received a further boost this year with the revaluation of Klarna and the successful IPO of Wise, and that's seen net assets under management soar to GBP 1.4 billion from just under GBP 800 million at the end of last year. Now turning our attention to our new business. I talked earlier about our net outflows, and I'd like now to put that in a bit more context. Gross sales in the first half of the year hit a record of GBP 9.6 billion. In fact, since the second half of 2018, we recorded consistent sales growth, nearly doubling sales from around GBP 5 billion to nearly GBP 10 billion today. So therefore, it's clearly disappointing having seen this growth in gross sales that our redemption picture continues to be challenged. We've seen net outflows in both our mutual and segregated businesses this half. For our segregated business, flows from seg mandates tend to be lumpy but nature -- by nature, and this outflow follows around GBP 700 million of net inflows over the previous 12 months. As for our mutual funds, redemptions have been concentrated in a few areas. Let me try and break this down for you in a bit more detail on the next slide. Starting with emerging market equities, a decision by Omnis to close out a mandate with us was behind most of the outflows, a decision that was widely reported in the trade press at that time. For our U.K. equities and European growth franchises, strong long-term performance and arguably attractive valuation levels for these markets have not prompted any significant client reallocation to them. Once sentiment changes and given us strong credentials in this space, we should see a better picture going forward. Merlin, as you know, is a mature strategy that has seen redemptions for some time. Performance, though continues to be strong with Jupiter Merlin Income, Merlin Growth and Merlin Conservative, all in the first or second quartile over 3 years. Finally, Merian Systematic Equities has seen a revival in its fortune since coming under the Jupiter umbrella with nearly all funds delivering either first or second quartile performance over 1 year. That has led to positive flows into the gear strategy, but with the long-only strategies we have seen clients reducing the exposure, notably in North American equities. We also had 1 client in the global systematic fund redeeming a significant proportion of their public market exposure in an asset allocation shift to private markets. As you can see, these 5 areas were responsible for more than all of our net outflows. I will also mention that the largest single loss not mentioned here was out of the U.S. smaller companies trust following the retirement of our manager earlier this year, an event widely covered in the trade media. Despite that, we have continued to see healthy inflows for all these areas with GBP 3.8 billion in gross flows over the same period, an increase of GBP 3.6 billion of gross flows in the previous 6 months. On a more positive note, we continue to see demand and support for our key growth areas. You may recall at our full year presentation in February, I spent some time talking about these funds of the future, funds that are shown here. These are funds which were in areas of client demand, where performance was good and many were approaching a crucial 3-year track record. I'm pleased to report all of those, bar one, have seen growth in net flows over the period, with some seeing a significant increase in their assets under management, notably Global Sustainable Equities and Strategic Absolute Return Bond and NZS. Particularly pleasing is the return to positive flows to gear. While 3-year performance continues to look challenging, that will improve markedly at the end of the year when poor performance in 2018 drops off and strong performance over the last 12 months replaces it. In fact, the recovery of gear has been so impressive that the strategy is now within single digits of its high watermark performance fees, and you can see this in Page 28 in the appendix. Earlier, I mentioned the strength of the Chrysalis Investment Trust, the trust carried out a successful capital raise in the first quarter, performance has been fantastic. Assets under management is up 85%, and they have accrued some significant performance fees so far in the year, which Wayne will cover -- come on to later. Finally, it's worth noting the continued strong performance of our fixed income range, and I'll turn to that in a little bit more detail towards the end of the presentation. I know you'd agree, there's quite a lot to be positive about here. In aggregate, these strategies in the future have already delivered GBP 2.7 billion in gross inflows and net flows of GBP 1.3 billion over the first half of 2021. Given that the same funds saw net inflows of less than GBP 300 million in the previous 6 months, this is rapid progress, and we expect that momentum to build as the year progresses. With that eye on the future, I'll hand over to Wayne for a more detailed look at our financial performance over the last 6 months. I'll then come back to you for a short update on our strategic priorities, including a focus on some of the key areas of our business. Over to you, Wayne.

Thank you, Andrew, and good morning, everyone. I'm happy to be able to report this resilient set of financial results to you today, continuing to demonstrate the benefits of the Merian acquisition and the strength of the business. This will be a relatively short presentation from me today. I'll run through the key movements in our numbers and outlook for the full year and end with a look at our capital. Andrew has already highlighted most of these numbers, so I won't dwell on them in too much detail here. They represent very strong growth in financial performance compared to the first half of 2020, which is before the acquisition of Merian. Underlying profit before tax was up 38% to over GBP 78 million, while underlying EPS increased 15% to 11.5p, a slightly lower increase due to the issue of shares in July last year, but you can just -- you can see just how accretive the Merian acquisition has been. In accordance with our capital allocation framework, the interim ordinary dividend was held flat at 7.9p. I remind also that our policy states that we'll only be paying an ordinary dividend this year. Any additional returns of capital will take place at the 2022 year-end at the earliest. So let's now look in a little more detail as to what has driven these numbers. Firstly, the move in profits. Following the Merian acquisition, we saw a sharp uptick in our profits in the second half of last year. So I've used this period as the most relevant comparator to explain how the business has moved. However, you will recall that we earned strong performance fees in H2 2020, and our current mandates only give the potential for performance fees in the second half of the year. So we've excluded profits from these in H2 2020 to get to a better comparison to this half year with the remaining profits reaching GBP 86 million for that period. As you can see, both revenues and costs are broadly flat over the period, although there are some underlying moving parts in both, which I will come on to shortly. You can also see that there is a GBP 10 million movement through investment gains and losses compared to the second half of last year. This is driven by 2 things: mainly the strong investment gains in our seed and hedge portfolio in the second half of 2020 as markets rebounded after the initial impact of COVID; but also there are some small losses on the seed portfolio this year. So the movement from a large gain to a small loss is at GBP 10 million. The operating margin remained at 36%, and I'll come back to discuss that in more detail later. Finally, we have GBP 21 million of exceptional costs. That's the intangible asset amortization and DEO charges relating to the acquisition and the restructuring costs that I announced in February. Full year exceptional costs are expected to be GBP 34 million, so that's just the full year cost for those items. Moving on to the next slide on revenues. Again, here, we've used the second half of last year as the most appropriate comparator, but taking out those performance fees from last year's numbers. As you can see, revenues were up slightly over the period by about GBP 2 million. Those net outflows that Andrew covered reduced revenues by around GBP 9 million, but this was more than offset by positive market movements and other changes, which led to an increase of GBP 11 million. The revenue margin was 76.6 basis points, which is actually 0.6 basis points higher than the run rate at the beginning of this year, and that is simply due to changes in business mix. All flows and markets will continue to impact the fee margin through the second half. My expectation is that it will be largely unchanged for the year as a whole. So overall, revenues were slightly up on the preceding 6 months. Before we move on to look at our costs, I wanted to briefly look at performance fees. This slide is an updated version of one which we showed you at the full year results. It shows all of the funds and collectively, the segregated mandates that have the potential to earn performance fees. It also shows what we would see if these funds saw 5% outperformance for the second half of the year. There is a version of this in the appendix, which you can look at later, which has a lot more detail around the current performance and high watermarks. There are a couple of things I'd like to draw out here. Firstly, it's important to note that any performance fees that we may earn in the year will come through in the second half. It's best not to model anything for the first half. Secondly, you can see that most of the performance fees are currently accrued by the Chrysalis Investment Trust, nearly GBP 50 million in its half year accounts to the end of March. Although they must recognize that cost, we can't recognize it as revenue until it crystallizes. Of course, that number can go up or down from here, but there have been some positive updates since March, which Andrew mentioned earlier. The final number will be calculated at their year-end, which is 30 September. The other mutual funds and segregated mandates have some potential, but are not currently accruing much in the way of performance fees, but it's still early, and that could change by year-end. Finally, and although this figure can vary year-on-year due to tiering and deferrals across all performance fees, we can expect around 55% earned to drop through to the bottom line for this year. Moving on to operating costs. I've included 3 separate 6-month periods on this slide, as I think it really demonstrates 2 things: firstly, how much the business has changed since the start of 2020; and secondly, how we've remained absolutely focused on cost control throughout despite some headwinds. Our administrative costs increased in the second half of last year as we completed the acquisition. But as we delivered on cost synergies and implemented the restructuring I highlighted in February, this has brought costs back down. The expenses for the first half were GBP 139 million, 17% lower than the preceding 6-month period, that's those cost savings this year as well as performance fee-related bonuses in the variable staff costs. You'll see that our total compensation ratio is 34%, in line with the first half of last year. But it's worth noting that the impact of deferred variable compensation on performance fees has added nearly 2 percentage points to this figure as deferred bonus charges on last year's performance fees, which I said would impact our ratio in 2021. Without that impact, we'd be looking at a total compensation ratio of closer to 32%. Our operating margin is at 36%, and which is the same as the first half of last year, but lower than the second half. Of course, the second half had strong performance fees, which led to an increase of about 4 percentage points for that period. But as I just mentioned, deferred bonuses on those performance fees have held back our operating margin this year. This bridge shows the move in operating costs, so our fixed staff and noncompensation costs. Firstly, we've achieved over GBP 5 million of synergies through the Merian integration, which is as we expected and as I guided to at the full year results. To reiterate from the full year, Merian was fully integrated at the year-end. We still have to decommission some smaller systems, which we will complete this year. And of course, we are looking forward to welcoming more colleagues back to the office in September. As I reported previously, along with integrating Merian, we have looked at our own operating model and how we need to be structured for the future. This has led to some changes in how we operate and where we have allocated our resources. As a result, our fixed staff costs have reduced compared to the second half of last year, and that is on top of the reduction from the costs from Merian. A large part of that saving is due to the restructuring program, which I mentioned in February. With other cost reductions from additional support we provided to staff last year, including remote working allowance for all our people. Importantly, our full year guidance for fixed staff costs remains unchanged at GBP 74 million. Again, excluding Merian savings, noncompensation costs were slightly higher in the first half of the year as expected. This was largely driven by admin costs increasing in line with the growth in average AUM as well as investments we've made in growth areas such as data and research. H1 costs are lower than we expect for the second half, principally as marketing and some of the costs are set to increase, along with some projects that we scheduled towards the year-end. Finally, you can see that we've incurred just under GBP 3 million of costs due to the strengthening of sterling and the settlement of historical indirect tax. At the full year, I guided to GBP 123 million of non-comp costs for 2021. The important takeaway here is that notwithstanding the impact of market movements, I don't foresee any changes to our underlying costs, but those GBP 3 million I just highlighted should be added to that. I won't spend too long on this, but as you can see, our capital position remains strong. Our surplus capital has increased period-on-period from GBP 90 million 12 months ago to GBP 134 million today. We'll cover this in more detail at the full year results, but I did want to highlight the expected impact of the new prudential regime on our regulatory capital position, which will take effect from the 1st of January 2022. We don't expect this to impact our regulated capital requirement, but it will reduce our admissible capital. I expect that to be around GBP 44 million reduction based on our half year numbers. Of course, we've been planning for this for some time, and the resulting capital surplus, if the changes were in place today, will be around GBP 90 million, which is exactly the same as the surplus this time last year. One of the primary uses of this strong capital position is to build our seed capital portfolio, nurturing new funds and helping them build their track records until such time as we see client money coming in. The 3 charts on this slide are great examples of this. How we have initially provided the capital to grow the track record before external client money is invested, it reaches critical mass and we can begin to reduce our holding, recycling that capital into new products. GEM Short Duration and Global Sustainable Equities are ones that Andrew mentioned earlier as potential drivers of future growth. And the third graph, the Pan-European Smaller Companies Fund is an area that we have previously highlighted as seeing rapid growth from our initial placing of seed. As we have been able to reduce our seed investment, we have, in turn, recycled that into another fund, the Global Equity Growth Unconstrained Fund. That's the NZS Fund we seeded in April this year and is already seeing strong interest and flows. And again, we expect to be able to recycle that investment fairly quickly, predominantly into sustainable and SFDL-focused strategies. You'll recall that at the Capital Markets Day in December 2019, we talked about a more disciplined approach to product development and the use of seed capital. These are good examples of how we are doing just that. We are thinking clearly about what needs to be launched in the future, and when it is right to do so. Redirecting our existing capital resources into new opportunities when existing seeded funds reach the right level. So in summary, and before I hand you back to Andrew, these are a good set of financial results with underlying EPS, up 15% compared to this time last year. As I said in February, the Merian integration is complete, and we are operating as a single team to deliver for our clients. We remain disciplined on cost management, continuing to focus on operating efficiency, which enables us to selectively and strategically invest for growth. All of this is, of course, predicated on strong investment performance. As a high conviction active asset manager that is absolutely crucial to our ongoing success and also gives us the opportunity to earn performance fees with strong potential again this year. All of this, combined with our strategic focus on product development, means we are well placed to grow the business going forward. With that, I will hand you back to Andrew.

Thanks, Wayne. Before I update you on some of the key areas of our business, I just wanted to spend a few moments talking about our plans for welcoming colleagues back to the office. The London office officially reopens on the 6th of September, with the introduction of our 2-1-2 flexible working arrangement, 2 fixed days in the office, a further day chosen by the employee and the potential of 2 days working from home. In regard to September, we've been redesigning new workspaces to facilitate this flexible approach and foster collaboration and you can see some of the examples here on the slide. We're also planning a range of employee sessions to reinforce our culture, which is so critical as people return to the office. Now as we turn into our key strategic priorities, you may remember I updated on these at our full year results. I won't go through all of them in detail now, but concentrate on a couple of areas where we've made further progress over the last 6 months. First, we have continued to diversify our business by expanding into new markets. In the U.S., we are now SEC registered, allowing us to sell Jupiter products in the country. We've also taken the first step towards establishing an East Coast office to house a new U.S. credit team, and we expect that team to be 3 strong by the end of the summer. Through the Merian acquisition, we are now licensed in Australia to distribute Jupiter funds, and we're currently developing plans to enter the market on the play-in, play-out basis. On the institutional business, it's a key driver of our overseas efforts. As you'll recall, we also have a strategic ambition for this segment of the market to make up a larger part of our overall assets under management. To this end, we've been adding further resource to this area. We've appointed 3 new institutional heads, one for the U.S. and another for the Asia, both new roles, and a new head of the U.K. to lead our efforts in this space. As part of our strategic priorities, I'd like now to focus on 2 key areas where we've made significant progress in the first half. The first is around our ongoing commitment to sustainability. In April, we became a signatory to the Net Zero Asset Managers initiative, committing to the firm to support our goal of net 0 greenhouse gas emissions by 2050 or sooner. We've been working hard to build ESG factors into our supplier selection process, and we plan to make key hires in the coming months to embed ESG into all of our corporate activities and processes. And our efforts in this space are being recognized. We are rated advanced by Morningstar in our ESG commitment level, 1 of only 5 asset managers to earn this accolade. And we earned a ratings upgrade from Sustainalytics to put us among the top 4 asset managers, which have done the most to reduce exposure to material ESG risk. Finally, in May this year, we were publicly recognized by the FT for our efforts in reducing our core greenhouse gas emissions, making it into the paper's inaugural list of European Climate Leaders. At investment level, our sustainability strategies together hold more than GBP 1 billion in assets under management and client interest remains strong with net inflows of around GBP 100 million in just the last 6 months. We've also restructured and clarified [indiscernible] in this area to showcase the breadth of our strategies. Earlier this year, Abbie Llewellyn-Waters was promoted to Head of Sustainable Investing, leading our efforts in this area with clients able to participate in the transition to a more sustainable world by investing in the Jupiter Global Sustainable Equities Fund. For those looking to invest in companies providing environmental solutions to man-made problems such as waste, water scarcity or pollution, Rhys Petheram, recently appointed Head of Environmental Solutions, and his team offer a range of products, including the Jupiter Oncology Fund, the first environmentally-focused fund that was launched in 1988. Assets under management growth in this area should accelerate further with the proposed launch of a SICAV version of our Global Sustainable Equity Fund before the year is out. Other sustainable products are also under development. But it isn't just in our dedicated sustainability range that we've been focusing on, you'll all be aware of the growing importance of SFDR as a criteria for fund selection on the continent. On this matter, our focus has been on authenticity and explaining what we do through clear client dialogue. All of our funds across our Luxembourg and Irish ranges qualify at least as Article 6 funds. This means an assessment of sustainability risk is fully integrated into our investment process. To support the growth of our sustainable strategies as well as to deliver on our commitments to our clients and all of our investment strategies, we've made several new investment hires including a commitment to significantly increase the size of our existing resources in our government and stewardship teams and adding fresh investment expertise to key portfolios and supporting functions. We've also offered to all of our employees the opportunity to study for the ESG investing CFA qualification funded by Jupiter. This has been developed by the CFA in conjunction with industry experts, including both Abbie and Rhys to cover a broad range of topics under this growing and critical area. We've also invested in technology, and we're proud of our ESG hub, a proprietary tool created in-house and which helps us monitor portfolio emissions, a necessary first step as we move towards setting interim targets around emissions and our commitment to Net Zero. And now looking at Jupiter's largest franchise, fixed income. As you can see, it's done incredibly well. Over 5 years, we've nearly doubled assets under management while broadening our product offering. From just 2 investment strategies in 2016, we now offer 11. And to support that expansion, we've grown the team from 9 investment professionals to 25. Many of them are homegrown talent following the footsteps of the Head of Strategy and dynamic bond manager, Ariel Bezalel, who began investment career at Jupiter. And we expect to continue to invest in the team. As I mentioned earlier, our new U.S.-based credit team will grow to 3 over the next month. Performance continues to remain exceptional, with 98% of assets under management outperforming over 3 years, with 67% of them in top quartile. Over 5 years, the figures are also impressive with more than 70% of assets under management outperforming. While dynamic and strategic bonds remain the juggernaut to the franchise, we have developed a diverse and growing product range over the last 5 years, which has made a strong contribution to overall assets under management. We are now well positioned in areas of client demand, including alternative fixed income, emerging market debt and high yield to name just a few. This is a franchise with a solid and loyal client base, which will continue to -- we continue to support and grow. So summing up our first half to you, we've maintained strong investment performance. We have delivered record gross sales, even though the net outflow picture remains challenging. We have seen strong net inflows into our funds in the future, and we've made significant progress on our strategic priorities including our renewed product development process, delivering better results, accelerating commitment to ESG through investment in sustainability strategies and an increased distribution footprint. We have moved the company forward by investing for future growth while maintaining a strong capital position and cost discipline. With this, Jupiter is well placed to deliver on its strategic ambitions. Thanks for your time listening to us today. Wayne and I are now happy to take any questions you may have. Back to you, operator.

[Operator Instructions] And the first question comes from the line of Gurjit Kambo of JPMorgan.

Just a couple of questions for me. So firstly, when we think about like the outflows on the 5 strategies, if we look at -- I think you said a lot about what was to do with just reallocating to other strategies. Has any of that you think been related to the, I guess, the shorter-term performance, which, obviously, has been weaker for some of the funds? Or is it not really driven by performance? That's the sort of first question. And how do you sort of feel sitting here now going into the second half, any signs that outflows may be moderating in those 5 strategies? That's the first one. And then secondly, just on the -- so Wayne, just in terms of the guidance around the nonvariable costs, which were GBP 97 million in H1. Can you just give us that number again? I sort of forget that number? And then how do we think about -- you've, obviously, made some redundancies and your headcount is 9% lower at the end of June versus December. Is that factored into that guidance? So just those 2 questions.

Thanks, Gurjit. I'll pick up the first. I'll let Wayne pick up the other questions around cost, et cetera. As to feeling with the second on the flows, looking -- on a forward-looking basis, we don't give -- talk about how a month is going or the predictions for the next quarter. So I can't give you any guidance on that. But in terms of the flows in the -- from those 5 main strategies that we highlighted in the deck. There were some that were, I would say, sort of one-off situations on the institutional side. So for example, we mentioned the Omnis and emerging markets. One, that was predominantly performance of the period. Our manager is a small to mid-cap and large-cap and performed extremely well through that. Actually, the short-term performance has been very strong, but that was probably the good decide -- decision there. In the other institutional side, we saw in the U.K. equities, institutional count moved passive. It's been an ongoing trend in the institutional market, including in the local [ SRE ] market, and it's just disappointing, because active is really delivering in U.K. equities. I think there's strong credentials as to why, but that was a client decision in that regard. And then another institutional client moved from -- moved a significant proportion of their public money to private money. And again, it wasn't performance driven. In the other strategies, U.K. equities and European, it was that short-term performance issues sort of driving that. I don't -- I really don't think so. I just think it's a lack of ongoing interest in the sort of regional strategies and a lot of money has gone towards growth strategies or towards thematic-type sustainable strategies. And it's just has -- in some of those cases, for example, U.K. Equities performance has been very strong, both short and long term in a number of strategies that we saw outflows on. So I don't think it was a performance issue. I see it more as an application issue and particularly in things like U.K. equities and our small and mid-cap teams are the largest in the space. So we are sort of, in some ways, if people are looking to reduce, we will be, one, heavily affected just because of our significant market share. I'd also say that if you look at that slide, we do highlight that we are still seeing good growth flows in those areas. So clients are still demanding in there, but there are also been more people redeeming. Wayne, do you want to pick up the other one?

Yes, absolutely. Thanks, Gurjit. Just to reiterate my guidance. So the 2 bits, I think you're looking at is the nonvariable costs. So 2 components there. The fixed off costs. We highlighted the restructuring program, the resulting fixed off cost for this year, exactly the same as I said in February, is currently looking at GBP 74 million. And then on the noncompensation cost side, there's those 2 components. So the guidance I gave in February remains the same at GBP 123 million. But we did have those indirect taxes and FX points this year. So that's a further GBP 3 million for this full year.

The next question is from the line of David McCann of Numis.

Three, please. The first one, probably for Wayne. Just on this slide, we are at GBP 44 million potential increase. Is there anything you can do kind of internally restructuring, perhaps to seed capital portfolio or something that might change the impact of that? That's question one. Secondly, Andrew, you talked about seeing kind of more encouraging growth in inflow growth. You gave us some color in those kind of 5 fixed areas. But maybe you can just talk more broadly across the group what areas are you seeing the most encouraging signs of growth in the flow growth? That's question two. And then finally, reference to Slide 13 on the performance fees and in particular in regard to Chrysalis. And on -- additionally, you're saying the AUM of that is currently GBP 1.4 billion, which compared to the last update from [ themselves gave ] was just under GBP 1.2 billion. So does that imply there's been another 20% performance growth that you're seeing, which hasn't yet been reported since then? And I guess if you were to tell you that 20% growth on to the Slide 13 disclosed. Does that mean we can see another GBP 40 million of performance fees on top of the GBP 49 million, which obviously the trust has actually reported. That's question 3.

Wayne, do you want to take question 1 and 3, and I'll pick up 2.

Yes, absolutely. Yes. Thanks, David. We're, obviously, still working through, that is there is still concession going on and a discussion with [indiscernible]. I think -- I don't think there's a lot we can do in terms of the admissible assets in terms of structuring our business. Of course, we will look at it. Most of it comes through in the fact that deferred tax assets are no longer part of your admissible capital. So obviously, that depends on where we are with certain aspects of the business. But we'll continue to look at it. I think it's -- unfortunately, I think that is probably the reduction we will see towards the year-end depending on how that moves. On the performance fee side, yes, I mean, you're right, the performance fee is -- in that schedule is showing the position at November -- sorry, I beg your pardon, at March. Yes, there has been market increases since then. But the NAV is still to be struck. It's -- the next one is for June, it's due come out next month. So you'll be able to see that in the marketplace as to how that's moving, obviously, gives you a better indication of where it will be for September. But of course, there is still another valuation point at the end of September before the performance fees eventually crystallize. That will be out in November. So again, you'll be able to see that.

And in the -- to your other point, David, about main areas of encouraging growth. I think in some cases, first being in some of the areas of -- disappointing areas of outflows, there are some issues that won't be repeated just by the nature of the fact that those clients have left. But the areas look attractive. First, on the institutional side, we are seeing greater institutional support than we have for another while in terms of buy ratings [ so that's safety ]. So for example, Abbie in the Global Sustainable Equities has achieved 2 buy ratings from different consultants over the 6 months. And we know that, that is a precursor, obviously, to future close. It can take a little while to come through, but the conversations are quite encouraging from that. So institutional conversations tend to be a longer process. But as you know, once they do come in, they can be both lumpy in size and they tend to have a higher duration. So I think there's quite encouraging signs in that aspect of it. NZS continues to do well. As a growth orientated manager, they performed really well in -- there's a swing to value. They actually held up and had a positive performance through the 6 months even in periods of being out of favor for their sort of strategy, their risk functions did well. So I think that's actually helped with some of the conversations with clients and that continues there. And then in fixed income, not just -- there's obviously a big debate out there around the likes of where inflation will be. And whilst Ariel has been very clear in his positioning, it is a go anywhere fund, so he can change as to data that was posted in July. We've obviously seen a shift back down in 10-year treasury, which have boosted the fund's performance. But so not just the main strategy having strong growth potential, the underlying sleeves now having hit crucial 3-year performance and very, very strong performance in those areas are increasingly having conversations around those. So I think that's a critical area as well. So I'm really encouraged by the fact that at the turn of the year, we looked at those what we thought were funds that were small that had potential to grow and they've really delivered that, both in gross flows and net flows, a significant increase from what we've seen in just the previous 6 months. And there's no reason that, that can't continue and build given both the capacity those funds have, the performance and they're much more in the sweet spot of where client demand continues to be. I hope that helps, David.

The next question is from the line of Hubert Lam of Bank of America.

A couple of questions. Firstly, on flows. Andrew, how optimistic are you for a turnaround for demand for European growth and U.K. equities? As that seems to be holding you back on the flow part. And are you happy with the organic strategy for now to diversify, or would you consider a deal if an opportunity arose? That's the first question. Second question is on operating margin. You reported 36% operating margin in the first half. It will probably be higher in the second half, I think, just due to performance fees. But what long-term average margin would you like to target?

In terms of U.K. and Europe, look, it's clear that I'm disappointed that we haven't seen a greater recovery in that area. I felt with Brexit sort of feeling like it's in the distance, the valuation support, particularly on things like U.K. equities and our strong credentials there, we would have seen that. So on that basis, having sort of been surprised that we haven't seen greater demand, I would -- I'd be very hesitant to sit there and say how optimistic or when I look to change it. At the end of the day, bottom line is we just deliver the performance to the clients and hope that comes through, and we're seeing some really strong performance. So we hope that that's -- we'll ultimately recognize them. And clearly, with the strong interest in things like private equity in the U.K. market, people are waking up to the fact that areas such as the U.K. are significantly undervalued on a global basis when you look at certain industries and certain valuations. So you've just got to be patient in this market. I think it will be rewarded for those clients, who see that and attracted to that. Yes. I think that said, obviously, we are looking at also diversifying our own business in areas where a lot of the newer strategies have greater appeal from a global jurisdiction, and NZS and Global Sustainable Equities, as I mentioned, are ones that we really see an opportunity for clients to be interested in all regions, not just the U.K. and Europe, where we're quite strong, but in our North America and our Asia development there. So certain of our new products have that more appeal that's more than just one region. In terms of M&A, would that be a part? I think I said 6 months ago that it's really off the radar for the assumed future and nothing has changed in this half. It's nothing we're looking at, it's not sort of on our radar. Our focus really is on the existing footprint we have and sort of building that out. In terms of operating margin, I'll let Wayne pick that one up.

Yes. Thanks, Andrew. Yes. Thank you, Hubert. So I mean, I've spoken through with the presentation, some of the one-off factors that are coming through this half year's numbers in terms of operating margin. If you strip all those points out, you come to an operating margin that is closer to around about 40%. That sort of ballpark moving up from there is where I would be targeting at this stage, getting back to where -- what Jupiter was, a very long time ago, in terms of very high operating margin, I think, is not the current target. But of course, performance fees do create some volatility in our margins, as you've already touched on, Hubert.

The next question is from the line of Gregory Simpson of Exane BNP Paribas.

Just a few questions from my side. Firstly, is it possible to provide some color on the client flows by region or country? Are there any differences you're seeing in terms of different markets? I know some of your peers seem to be reporting improving flows in Continental Europe and markets like Germany, for example. So if there's any color there, that would be great. Secondly, on ESG, I think I may have misheard you, but I think you mentioned under SFDR, the majority of Jupiter funds classified as ASCO 6. Over time, will you look to move more into being ASCO 8 or 9? Is it a disadvantage to not have more funds in the higher article buckets, do you think? And then just lastly, I think you mentioned you're now U.S. SEC registered and can sell Jupiter products in the country. How advanced are the kind of plans around distribution there? Are there any -- are you kind of connected to the warehouses or what's the kind of plan of action in the U.S. retail market?

Thanks, Greg. In terms of the -- we have seen -- in terms of regional sort of split, we have seen encouraging flows in Continental Europe. Now remember, our -- [ specific sales, sort of ] our client base in the U.K., and it's probably been a greater percent of that of where we've seen the outflows has been given U.K. equities, which is a predominantly U.K. business, has seen a large part of exposure in some of the things I mentioned around outflows of U.K. institutional or the Omnis account or the investment trust. So I'd say that the outflows have been concentrated in the U.K. region where actually we're seeing growth outside of that, particularly in Europe, where we've seen that Asia has been in inflows as well the U.S. And then you asked a question -- I'll come on to U.S., and I'll come back to the SFDR. In the U.S., we've only just got approval in the last few months. So it's very limited to what we can do. And our proposition in the U.S. is a wholly institutional proposition. So we know that will take a little while. That's one of the reasons we've just hired the U.S. Institutional head to support the team over there. We wanted to make sure we had the sort of support in place, the approvals in place. So I would expect that the rest of this year will be more about building the basis for what we do. I think it will be a 2022 story in terms of growth for us out of the U.S. just because it's institutional approach of what we're doing. Now the buy ratings, we've got in a number of strategies that helps us, because they are with globally recognized consultants. So they immediately are applicable to the U.S. So there could be a chance that they come in this year, but I suspect that it will be 2022 for the U.S. for us, and then we'll build from there with further distribution support to that business as sort of the conversations and our business builds there. With regard to SFDR, yes, we did say all of our funds -- at least all of our funds are Article 6. Some are Article 8 and Article 9, but they're a much smaller proportion. The very vast majority of our funds are at 6. I think it's really important as this is an emerging area that we're really clear about being quite authentic about what we're doing. Some of our strategies may actually satisfy the requirements of Article 8, but before we would sit there and say that, we want to be really clear that we are going through and able to demonstrate that quite clearly. I do feel there's been a bit of a rush to sort of label funds as Article 8, and I'm not sure there's been as much rigor in understanding the process behind that. And for us, it's really important about making sure we can deliver on that. So there's a lot of work we're doing around that. You will have seen the sort of certification of it has been pushed back by the regulator by at least 6 months. I think that's sort of recognizes the challenges in some of the proof of this. So we're taking a cautious approach. But you will see us launch more Article 8 funds. We mentioned, obviously, the offshore version of Global Sustainable Equities will be coming this year. There's a number of other strategies, some in the sustainable space, but some of our existing strategies that will -- that can meet that criteria, we'll launch either later this year or early next year. And definitely, you're right that the way the clients are talking over in Europe is becoming an important area for you. So it is something we're monitoring and I would love to, but I don't think we're disadvantaged today, but it is something that is a space that's moving quite rapidly. So you do have to be quite agile and quite flexible to change plans to suit that. But at the end of the day, it's all about making sure what you deliver is very much authentic and appropriate in terms of the badge or the requirements the clients expect.

The next question is from the line of Haley Tam of Credit Suisse.

Actually, most of my questions have been answered. But if I can have 2 quick follow-ups then. Just on the SFDR point that Greg asked about to confirm them some of the shareholders have been talking about targeting 75% of their fund range being Articles 8 to 9 later this year. That's something you might still consider in the future, but just not yet to just understand your position? And secondly, I think the second annual assessment, the value report came out recently. I've had -- I've not read the entire thing yet. But obviously, last year, you had some fee reductions and I can't see anything of that sort this time around. Is there any sort of comment you can make there in terms of whether this is now you think fee rates are now a good sustainable level or whether this is something which might still change in the future?

Thanks, Haley. In terms of the SFDR point, I think it's way too early for us to be committed to what percent of our funds and over what time frame would be in certain categories, partly because I'm just not sure, anyone really knows enough about how to deliver to the requirements that the regulator and the client pick. So for us, we're taking a more cautious approach. So we're doing a lot of work on it. I think we can have a very strong conversation with clients about the work we're doing and the differences in our application of that to go with a commitment of 75% as you say, by the end of the year, but you won't see me do that. It's -- I think that -- for us, that would be unrealistic to just -- to commit to that without the basis of being able to prove I could do that sufficiently to what I'd expect to deliver the clients under that. In terms of value assessment, yes, you're right that we publish sales in the last day or so, our second one. Actually, we've got very good marks from things like the Fund Board Council for our first one. notwithstanding, obviously, the regulator's recent critique of other managers out there. We weren't one of the ones they critiqued, but obviously, we are looking at what they put out to see areas of improvement. We're also -- our first one was struck right of -- in the end of March valuations for the COVID -- beginning COVID situation, which obviously meant was we've seen quite a significant improvement in both performance and asset level and absolute and relative performance since that sort of point. So actually, we've seen an improvement in the overall picture for us as a business. And so I think that's sort of come through. And therefore, we don't feel there's any imminent need for revaluation or fee reductions. As you highlighted, we had moved some of the direct book to a different fee fund given the regulator allowed us to do that, which previously wasn't able to -- open to us. And having done that, that sort of addressed some of the concerns that came with the first one. So yes, there's been no change necessarily from a fee position through the second round of value assessment.

And this concludes our question-and-answer session. I would like to turn the conference back over to Andrew Formica for any closing remarks.

Well, look, everyone, thank you very much for your time today. Hopefully, we tried to give you a full as picture as we can of the business. Obviously, the net outflow picture, which was some of the key pictures -- questions coming through is disappointing for us, and it does take a while after some time for these things to turn. But I would want you to understand there's a lot of work being done that has improved the position, whether it's the product development side of our business, you can see from Wayne's slides that we're getting a much greater discipline and therefore, success rate in new product launches. A lot of the areas we've been investing in over the last 3 or 4 years are really starting to deliver. And there's been a lot of good work done about building out the business for future growth. So whilst at a half level, it may look quite disappointing and we ourselves aren't happy with the position that was delivered in particular net flows. There are a lot of encouraging areas for us. And then finally, on the Merian deal, which is now fully integrated, but the benefits of that deal from -- across a number of metrics are really coming through to us. And I think it's really strengthened the business, both now and on a forward-looking basis. So if there's any further follow-up questions, please do reach out to Alex in the Investor Relations department. And if anything else we can help with, we're happy to answer your questions after this as well. Thanks a lot. Have a great day.