Man Group Plc (EMG) Earnings Call Transcript & Summary

Right. Good morning, everybody. Hopefully, you can hear us and see us. Otherwise, this will be a bit of a lonely thing. Thank you for joining us today. Those who don't know, I'm Luke Ellis, the CEO; and this is Mark Jones, our CFO. Glad to see so many of you on the call today. I hope you and your families have remained safe and well during this, well, pretty difficult time. Hopefully, this is the last time we have to do this virtually [indiscernible] the vaccine rollout. But then again, let's see where we are in the summer. As this is our second results conference call using Webex, can I remind everyone that if you'd like to ask a question, you'll need to access this presentation via the Webex link found on Page 3 of the results as a results press release rather than the dial-in option. [Operator Instructions] As usual, I'll start with some highlights and an overview of last year. Mark will take you through the numbers. Then I'm going to discuss some of what we've achieved and the strength we see in the business today. And after that, we'll open to questions. Right, all that out of the way, let's go down to the business. So a few events in the last 75 years have had a profound impact on our society and our markets as the COVID-19 pandemic. Looking back at 2020, I'm really proud of how we've responded at Man Group. Despite the market volatility, the public health emergency and more than 99% of the firm working remotely for almost all the year, our team has not missed a beat, continuing to deliver for our clients and our shareholders throughout. Above and beyond their professionalism and commitment, I'm really proud of how the whole firm has come together to support and look after each other and our clients in these difficult testing times. We've seen a year with significant and, at times, unprecedented volatility in financial markets. In March, markets have one of their steepest and fastest full nonrecord, followed in April by the reverse of the steepest of rallies. Crucially, we were able to respond that the speed circumstances required and to demonstrate the benefits of our proactive risk management and our super-efficient trading capabilities and thereby, rapidly adjust positioning to the changing markets, delivering for our clients in a time of crisis. The dramatic improvement in sentiment towards the end of the year, after the first of the vaccines was approved, particularly benefited our long-only strategies, but also very importantly, our momentum strategies as well. Against this background, we grew our funds under management to a new record of $123.6 billion. I'm going to try and drop the dollars all the way through. So if I don't say a number, it's in dollars. That's $5.9 billion more than at the start of the year. We saw net inflows of $1.8 billion for the year with inflows in the second half coming in at an annualized 6%. The AHL target risk for our new product continues to be an important contributor. We passed the $10 billion funds under management mark during the year and continues to have great traction with clients. Despite ending the year at record fund, because of the market events of March through June, the average FUM for 2020 was less than the 2019 average, and this resulted in a reduction in management fee revenue in the year to $730 million. It's important to note, we saw strong momentum into the year-end, in both performance, which, of course, also compounds to increase our FUM and also inflows, resulting in run rate net management fees of $815 million at January 1, while overall management fee profits in 2020 grew by 6% supported by our cost discipline. Performance fees were reasonable, helped by what feels somewhat like a regular December performance start, but down from a very strong year in 2019. So we saw total earnings per share fall year-on-year as a result. As you know, our robust business model and its strong cash flow generation has allowed us to return about $0.25 billion to shareholders in 2020. A testament to our belief in Man's future growth trajectory is our decision to move to a progressive dividend policy, reflecting our confidence in the sustainability and cash flow generation in our business looking forward. I'll talk through that in more detail later. This year's full year dividend has been set to $0.106 per share and marks the baseline for the new progressive policy, resulting in a final dividend of $0.057 per share. Before we dive into more detail on our performance in 2020, I'd like to step back for a moment and reflect on the key fundamental strength of Man Group compared to the wider industry. We have been and always will be a technology-driven investment manager. We are a global leader in applying technology to investment management, and we are essentially unique in the listed space. Our depth of knowledge and expert experience enables us to harness the power of technology across alpha generation, trading and execution on our operating platform. Technology doesn't work in isolation. We're a people business. Our great people make our technology, and our technology makes our people more effective in everything they do. That combination of talent and technology gives us a sustainable competitive advantage and allows us to deliver for our clients, which drives the growth of our business for shareholders. Turning back to 2020, our funds under management increased by $5.9 billion to a record high of $123.6 billion, due to positive absolute performance of $3.3 billion across both alternative and long-only strategies and net inflows of $1.8 billion. We calculate value growth of about 4.6% better flows than peers with equivalent strategies with particularly strong market share gains in quant alternatives. You will remember that we had small net outflows in the first half of the year, particularly in the second quarter, as certain clients saw cash in response to the impact of the initial COVID-19 market planning. Then in the second half, it was a return to business as usual for Man, and we saw good net inflows primarily from our alternative strategies, which annualized at about 6%. Let me now talk you through our flows and strategies in more detail. In alternative strategies, we had $4.3 billion of net inflows. The AHL target risk family of funds was the largest contributor, followed by institutional solutions in AHL and AHL Evolution and a number of the GLG liquid hedge funds. We've talked about the fact that AHL Evolution has been closed to new money for some time to ensure we have enough liquidity to continue to actively manage the risk in this strategy. We were encouraged by having no meaningful liquidity issues in this portfolio during the March, April market dramas despite significant changes in positioning. And so after a thorough analysis, we decided we could take in an extra $1 billion to the strategy. We were able to fill that in a matter of literally a few weeks with an incredibly high-quality list of clients. These inflows into alternatives were partly offset by some outflows. There's always some strategies down as well as up, principally this year from GLG ELS, the alternative risk premium and the EM total return strategies. Our long-only strategies saw net outflows of $2.5 billion, partly driven by recent underperformance across a few of our valuation-focused strategies, both systematic and discretionary, and noticeably our Japanese value strategy. Net inflows from the GLG UK Undervalue assets team, it was really in the U.K. income strategy, but it's the same team now, of $1 billion, partly helped to offset the long-only net outflows. And we've been seeing an increase in interest in value-focused strategies, I think [ Andrew Formica ] mentioned yesterday, since November. In fact, as some of the analysts have noticed, even JCAs actually had net inflows in 2021. Overall, $1.8 billion of net inflows for the group is a solid outcome, and even more so given we think we outperformed, definitely outperformed, peers by 4.6% as the equivalently weighted peer group saw net outflows. Going forward, we are convinced that liquid alternatives will continue to be a significant part of the answer to the problem of low bond yields for many clients. Alternative managers with excellent risk management skills who can deliver historic underlying returns and risk profile will continue to grow and we are extremely well placed in that respect. So turning to performance. 2020 was a historic year. Financial markets responded to the pandemic initially with alarm and rapid and sizable clients, so then rebounded with uncharacteristic speed as governments and central banks introduced unprecedented measures. There was then a period of relatively steady market, offering security selection, alpha opportunities at different companies COVID handling led to lot of soft and credit dispersion. Then in the last quarter, positive news about the efficacy and safety of vaccines began to help the world foresee a normalization of life and economies and equity markets went up rapidly. Our alternative strategies were up 2% on an absolute basis, delivering $1.5 billion of alpha for our clients. The gains were driven by strong performance from AHL Alpha, which was up 7.9% and AHL target risk up 5.7% as well as solid gains across the GLG head funds with GLG innovation at 17.4% and GLG event at 11.7% being the standout performance. Our alternative strategies also did well last year on a relative basis and outperformed by 1.4% overall. Having benefited from the rebound in equity markets in the latter part of the year, our long-only strategies were up 4.3% on average on an absolute basis, generating a further $1.8 billion of gains for our clients. The gains were delivered by various strategies, including the GLG Continental European growth and Numeric Global core. And we're growing despite the weaker performance in the value by our strategies, particularly JCA and the GLG undervalued assets. The environment for value investing in Japanese equities was particularly horrible in 2020. While Man Group's funds overperformed by -- sorry, try that one again. While Man Group funds this time underperformed by 1% during 2020, I would point out 2 things. Firstly, GLG Japan core alpha represents more than 100% of the overall relative underperformance of 1% despite being only around $3.4 billion of FUM at the end of the year, which tells you how tough value was in Japan last year. And secondly, things look rather different in 2021. As of the end of February this year, JCA was now outperforming by 11% year-to-date. No, that's not a typo, it really is 11% outperforming year-to-date. Meanwhile, our alternative strategies did well last year and outperformed [indiscernible] by 1.4% overall. It's also worth noting, we have very little exposure to the frothy part to the global equity market. We're not the type of investors to own names with their first profits or even earnings somewhere beyond the visible horizon. And our stack holdings are actually at multiyear lows. With that, now let me pass you over to Mark to talk through the numbers.

Thank you, Luke, and good morning, everyone. I'll start with a bit more detail on funds under management and then walk you through the P&L. As Luke noted, the combination of net inflows and positive investment performance took our fund to $123.6 billion. We saw strong inflows into alternatives, in particular into target risk within total return, the $3.7 billion that you can see there, the total return in aggregate. We also saw inflows into our absolute return products with a strong Q4 performance in particular. It's worth noting and repeating that we saw meaningful market share gains during the year with net inflows being 4.6% ahead of relevant industry categories. We think that reflects the quality of what we offer to our clients. Overall, we delivered $3.3 billion of investment gains across both alternative and long-only strategies. Both made gains during the year. Alternatives had a strong performance into year-end, in particular from a number of our quant alternative strategies. Long-only performance improved with markets. And as a reminder, we have a diverse set of geographies that we invest in with a number of strategies focused outside the U.S. So as that -- don't just think about the S&P. Turning now to the P&L. 2020 illustrates the strength of our business. Despite the challenging environment, we saw growth in management fee profitability, solid performance fee earnings and continued cash generation and returns to shareholders. Core net management fee revenues were $730 million for the year, down 3% due to lower average FUM and a small decline in average net management fee margins during the year. Performance fees were $179 million, largely generated by AHL and GLG strategies. And we made a gain of $20 million on our seed book. We actually made gains in both the first and second half, which reflects both effective risk management, but also strong performance despite the volatile environment. We grew management fee profits by 6% with effective cost controls more than offsetting the revenue drops as markets fell during the first half. Efficiency remains an important driver of profits over time, and we've built an efficient and effective operating platform. 2020 is the first year with 0 legacy revenues after the final roll-off from our guaranteed products business, so core and adjusted measures are now equivalent. The decline in management fees during the year was entirely driven by the drop in long-only fees driven by the market declines that everyone experienced. Alternatives actually grew steadily over the year. Run rate net management fee revenue increased to $815 million at the end of 2020, again, driven by alternatives with a strong year-end, giving us good momentum into 2021. The group's total revenue margin fell by 2 basis points during 2020 with the reduction continuing to be driven by mix effects. As we discussed at the interim results, the discretionary long-only margin declined as Japan has shrunk and fixed income strategies have grown. Total return margins have continued to grow as target risk increases as a proportion of the assets. The run rate revenue margin has increased to 66 basis points as we come into 2021, and that's driven in particular by the growth in absolute returns and the inflows into our AHL Institutional Solutions and Evolution that Luke mentioned. For those of you missing our old revenue margin chart, we've started publishing a separate data pack alongside the results this year. And you can find in it various other nuggets there. Hopefully, that will make everyone's modeling easier. Turning now to performance fees. Performance fees for the year were $199 million. These include $124 million from AHL and $54 million from GLG. And then the investment gains, I mentioned, of $20 million. We have strong performance fee optionality and diversity with $49 billion of performance fee eligible FUM at year-end. You can also see there's a wide range of different strategies that make a meaningful contribution. We've seen over $1.1 billion in performance fees over the last 5 years, and they remain a very valuable source of profits and cash over time. Turning now to costs. Fixed cash costs for the year were $291 million, 10% lower than 2019 and lower than our guidance of $330 million. The decline reflected 3 things. Firstly, us taking steps to control costs in response to the market declines. That was about $12 million of the drop. $12 million was COVID-related, particularly reduced travel and event spend. And then FX helps by around $9 million, in particular the sterling dollar exchange rate being low. Those cost declines were important in protecting overall profitability in 2020. And as ever, running the business efficiently remains a focus. In 2020, the compensation ratio was at the higher end of the range, reflecting the drop in performance fee revenue compared to 2019. As a reminder, the ratio is generally between 40% and 50%, depending largely on the overall level of revenues and particularly performance fees. Asset servicing costs were $55 million, in line with 2019, which equates to around 7 basis points of the relevant FUM. 2021 cost guidance for fixed cost is $335 million, based on an FX rate of 1.4. That reflects slightly under $20 million FX headwind, $6 million from the need to sublet space in our Mainland London office that we mentioned in the interim results. And an assumed $5 million increase as some of those COVID-related costs start to rebound as the world starts to normalize. The remainder reflects technology investments into areas where we see strong growth potential going forward. And finally, I'll just touch on our balance sheet. Our balance sheet remains strong and liquid with net financial assets of $716 million, and we continue to generate strong cash flows. The strength of that balance sheet is comforting in times like 2020, but it's really the cash generation of our business that enables us to navigate stress scenarios while continuing to invest. Last year, we were able to focus on looking after our staff and our clients in the depths of the crisis. Whilst many other companies suspended or cut their dividends and buyback programs, you've seen us grow our dividend year-on-year, moved to a progressive policy and commenced a new buyback program in September. The fact that our business is actually stronger at the end of the year like 2020 than the beginning is a great testament to the strength and flexibility of the model. With that, I'll hand back to Luke.

Great. Thank you, Mark. I'd like to return to this slide to emphasize what's unique about Man. If you look across the listed asset management firms around the world, I would challenge you to find anyone with our capabilities and our leadership position. We hire the best technologists and we provide them with the environment to thrive. Our experience in quant investing is unparalleled, and we continue to emphasize investment in quant research and in technology to protect and grow our lead. When we look at quant and tech expertise, events and resources, we think we have a huge competitive advantage in our industry like all others becomes ever more technology-driven. Technology is not just about making investment decisions. It has everything we do at Man. Over the years, we've invested in and built a single robust tech platform that supports alpha generation portfolio management, trade execution operations, compliance, risk management, all the way through to fund accounting. Because of this, we can manage a huge range of strategies, instruments and geographies at great speed and scale. That support for growth in that we can add new strategies easily and at low cost. It's also about the quality of our control environment as we can manage calmly through periods of market stress because we could see in one place all the information we need to make decisions, and we can comfortably deal with spikes and volumes as funds rapidly adjust their risks. I wanted to give you a flavor of how we use technology to address investment problems that humans alone can't handle efficiently. You have an illustration here of one company in the way that clients, competitors and suppliers interact with and therefore affected prospects. The size of the dot represents the size of the company, and the distance from the center represents how far away the relationship is. Every day, information becomes available across that network that is relevant to an investment in that company. In today's interconnected global world, that information is released at different times in different languages and there was a huge amount of it. Even if you had 100 analysts, they couldn't practically process the volume of breadth of information manually in a reasonable time frame. Technology solutions are brilliant for these sorts of problems. Certainly, you can see it easily with both the huge volume of information and the rapid reactions being required to expect alpha from the new information. It doesn't matter whether it's the middle of the night to require by the companies in the sector release report simultaneously. You can process information in multiple different languages and yes, even emojis, as easily as you can in one language. When you have access to these sorts of sophisticated tools, you can discover new public information in financial markets and act on it. If you don't have the technology, then you'll see price moves, but without understanding their underlying cause until it's too late to benefit. The tech solutions we have at Man aren't just feeding quant model. We've also equipped our discretionary managers with technology to help make them better -- to help them make better decisions. It's giving them information they can't process manually but they can access with technology or it's saving them out of manual information compilation. For instance, all our discretionary PMs now will get a daily report with all the names being talked about on the infamous Wall Street Bet Reddit page with sentiment readings to what the forum users are posting. The technology-led to discretionary PMs focus on using their skills where humans excel while delegating more and more of the drudgery of information collection to their machines. Part on the slide to give you a feeling of how ingrained technology is in our culture, and it sits at the center of everything we do. The depth of our experience and the magnitude of our know-how is exceptional. With all of the magnitude ahead of most asset managers, and we're focused on competing with the 3 or 4 top players globally, the investment we've made and the culture we've built gives us a huge and persistent competitive advantage. The world's focus on sustainability and companies acting responsibly has been increasing for many years and obviously took a notable uplift as a result of the pandemic. As an asset manager, the sustainability of a company and its business model is critical to us. We have an integrated approach to ESG with a particular data focus. Our framework encompasses all of our investment strategies and allows clients to choose the level of ESG integration in their particular investment solutions. We've taken our technology expertise, our data science and our investment know-how and have built proprietary ESG tools that are used every day by our PMs. We started to disclose new data point that we will update on a regular basis. Based on the global sustainable investment alliance definitions, Man Group has more than $43 billion of ESG integrated funds. In the same way we're focused on managing our clients' capital responsibly, we want to manage the firm responsibly. Culture is critical to any organization. We put a lot of time and energy into making sure that we're an organization where people feel that they belong and could be proud to work and an organization that truly reflects our values. While culture is intangible and hard to measure, you build it with tangible steps and actions and the impact of a good strong culture is very meaningful for all stakeholders. You can see here a range of our tangible steps and commitments. We're committed to reducing our absolute carbon footprint and making consistent transparent progress on this. From 2020, we have offset any remaining emissions by supporting certified offset projects. And we're pleased to report that we're on track to meet our emissions reduction target set for 2022 and are committed to achieving net zero-carbon emissions in our global workplaces by 2030. Our charitable funding efforts are primarily focused on promoting education. There were -- a number were directed into food banks and so on in this year and are mostly run through The Man Charitable Trust in the U.K. and the U.S. equivalent. And our people volunteer a significant time to help the charities we donate to and beyond. We've also, this year, invested GBP 10 million with our -- into our U.K. community housing strategy, which is designed to accelerate housing provisions that particularly needed for many of the key workers that support the communities in which we all live. In addition to the -- our focus on delivering outperformance for our clients, we're positioned for continued compounding growth over multiple years. We developed innovative investment strategies by hiring exceptional talent, creating a collaborative environment and leveraging our 30-plus years of experience in liquid alternatives and systematic investments. AHL target risk is the strategy behind a number of funds to which we've been able to capitalize on our technological lead. And as you've heard, it's a sustainable contributor to our current results, but also our future growth. In 2014, target risk was just an idea to develop a new, long-only multi-asset strategy that will provide diversified exposure to a range of markets and adapt rapidly to changing market conditions using the same techniques that our hedge fund people are. The research was developed. We provided the seed capital and we waited well, performance was generated. And in 2020, after only 6 years, it was the single largest contributor to net inflows, and it's the part of $10 billion funds under management milestone in late 2020. Hiring exceptional talent to broaden our capabilities is another growth driver. On the discretionary side, 2 years ago, we hired Mike Scott to build the team and develop a range of GLG high-yield funds. Since then, the funds have generated impressive market-leading returns. In fact, I think the firm literally ranks #1 on [indiscernible] over that period. And we've raised $1 billion, which feels just like the start. Similarly in the last quarter of 2020, we launched our GLG Asia (ex Japan) equity strategies which are managed by an experienced team who joined Man last year. In our alternatives offering, we've broadened across both equity and credit strategies during the year. There was a number of launches that we think could each manage more than $1 billion in the future if things go to plan. As well as our multi-strategy offering Man 1783, which, of course, can be much larger. Our disciplined capital allocation policy drives growth through earnings-enhancing M&A when and if we can find relevant opportunities with reasonable pricing or via share buybacks. Both options accelerate our core earnings per share growth. Since I became CEO, we've made it a big priority for the firm to adopt an outward-looking mindset, to listen and respond to our clients. They want a diversified range of products and new innovative solutions to help them meet their goals in the changing world. The breadth and quality of what we do is compelling for clients. It allows us to be broadly relevant to a wide range of clients across the world and, importantly, to remain relevant throughout the market cycle. What you see from these charts is recognition from some of the world's largest and most sophisticated investors that we've built the products they need and want. Since the end of 2015, we've seen $26 billion of net inflows from clients. And the number of clients for whom we manage more than $1 billion has grown from 12% to 22%. When clients invest in one product with us, they often make a second, third, fourth investment. And you can see here about $88 billion of our assets come from clients invested in more than one strategy. When you deliver for your clients, they reward you and the new business that drives growth for shareholders. Man Group's business has been through a transformation. And at times in the past, the runoff of our legacy structured products business has meant that we've appeared to be running at double time just to stand still. That transformation is now complete and we've reached an exciting inflection point. This is the first year with no guaranteed product revenue to shrink away anymore. And the growth in our core business feeds fully into our overall profitability. Our focus on building client relationships and delivering innovative products really works. Compared to 5 years ago, our core net management fee run rate was growing 23% to 815. We've grown core management fee earnings per share by 98%. We've also grown our performance fee optionality. I've said it before, I'll say it again, I'll keep reminding until it gets boring, performance fees are a very valuable earnings stream for shareholders. We've earned $1.1 billion in performance fees over the past 5 years. They are a very valuable part of our cash flows over time. And if the market prices, those earnings cheaply, and we've shown we've been very happy to use these performance fees to buy our own shares and drive earnings per share growth that well, which brings uniquely to the next one. For investor, this chart clearly illustrates the strength of our business. There's a natural bias in market to focus unduly on the recent performance. As you could see, the longer-term strength is self-evident and impressive. Over the last 5 years, we've returned over $1.4 billion to shareholders through dividends and buybacks. That's about 50% of our market cap as we stand here today. Our cash flows may vary year-by-year, but over time, they support strong and steady returns to shareholders. And they've just proven resilient to even the extreme stresses of a global pandemic. We didn't miss a beat during this pandemic. Our cash flows remained strong. We grew our dividends. We completed one buyback and we started another. This morning, we announced the change to our dividend policy while maintaining our disciplined approach to overall capital allocation. Our new progressive dividend policy reflects our confidence in our strategy and our future growth and the resilience of our business model. We recognize the importance of dividends to shareholders, and we're confident that this revised policy will deliver sustainable dividend growth over the years ahead. Our overall capital allocation policy beyond dividend remains unchanged. We expect to generate material excess capital above the dividend. Any excess capital will be used to augment growth either via selective acquisitions, should we find sensibly priced opportunities, or return to shareholders with our share buybacks or special dividends as appropriate. The numbers on this page show what we can deliver. Over the past 5 years, as we said, we generated $1.1 billion in performance fees. We've outperformed our peers by 3.2%. Through our alternative strategies, outperformance is about 2% per annum versus peers. We've seen increasing confidence from clients who've invested an additional $26 billion, taking our funds with record $123.6 billion. We've returned more than $1.4 billion to our shareholders. The business has performed well, and I'm really excited about what we can do from it. 2020 was dominated by the impact of COVID-19, the upending of our normal way of life and the public and health emergency the world has been facing. 2020 saw exceptional work from the health care sector, creating vaccines in record time. It also showed the best side of humanity as communities and neighbors look out for one another. I can't express how proud I am for everyone at Man. They worked together in the difficult and challenging times and looked after returns. We're an agile, resilient firm, and despite the backdrop of 2020 we've delivered record fund, net inflows, an increase in management fee earnings and a new progressive dividend policy while continuing to invest in our technology and talent. The hard work we've done over the last 5 years on our business model is the foundation that makes all this possible and also the platform for further growth. It looks as if the economic uncertainty created as we will, hopefully, exit the pandemic will lead to more intra- and inter-market volatility in 2021. And we might even see higher sustained bond yields. We would look forward to this as it would give lots of opportunity to add alpha and for sophisticated risk management to add further value. From a business point of view, 2021 has got off to an encouraging start. We've continued with the good momentum from the fourth quarter. Clients' engagement is positive. Performance has got off to a strong start. We have an exciting pipeline of innovative new products. As you can hear, I'm proud of what we've delivered, and I'm also really excited about what we can do from here. So with that, we'll open it up to questions.

[Operator Instructions] So thank you for the time, and let's go with the questions. And looking at this, Haley, I think was first in. So Haley, if you're there, Haley Tam, if someone can unmute you and you can go with your questions.

Perfect. Hopefully, you can hear me fine. So I have 3 questions, please. First one, just on Slide 25 in your aggressive dividend policy. I wonder if you could just confirm to us that in the absence of M&A opportunities, your new policy is not expected to affect your ability to carry out the steady program of buybacks that we've got used to, the first question. Second question in terms of management fee margins. I think it's pretty unusual to see for you or for any asset manager a run rate fee margin actually above the one that's just been reported. I think it's the first time I can actually remember for you guys. So I just wondered, obviously, that's due to a mix of absolute return growth and the mix shift within total return. If there are any comments you can make to us about your confidence in sustaining this sort of level from here. And then the third and final question on Slide 21, your current priorities, you listed out a few areas like more target risk funds, Man 1783, systematic, et cetera. I just wonder if you can give any color in terms of the capacity for those and any visibility you have to client demand at the moment.

Cool. Okay. Why don't I take the first one, you take the middle one. So on the dividend policy, yes, you're right. As I mentioned, we expect to keep generating excess capital. And we will either -- so if we get a chance to buy an interesting business to integrate it and it's at a sensible price, then we would do that. But without that, we will return it to shareholders either through buybacks. Or if the shares ever look above what we think of as fair value, then I guess we might do a special dividend in that circumstance.

On the margin side, I think the sort of more recent and positive trend on margin is the growth of target risk within total return which has been moving up the revenue margin within that part of our business, which we mentioned at the interims, but that's continued through the second half and expect it to continue into 2021. Otherwise, it's really the same as we've always spoken about. It is mix driven for us is what clients are choosing to buy. So the fact that we were able to create capacity within Evolution, which as Luke mentioned, sold extremely rapidly in Q4 has a very positive margin impact, but it's really about where the incremental demand is. So the general trends haven't changed. Particularly, it's all about mix. There's some positive trends within total return which is more recent which helps out. But we still premise the business that clients will tend to buy some slightly cheaper products over time. And we, therefore, see net flows to drive revenue growth and drive profit growth.

And on the new fund launches, look, we don't like to sort of come up with specific capacity numbers on things when you launch them in large part because otherwise then people assume if you don't hit capacity, there's something gone wrong, which isn't really how it works. But we're very confident that we can keep rolling out strategies with innovation, interesting returns for clients and enough capacity to keep our sales force busy, I guess, is what we really care about. Thank you, Haley. Paul McGinnis. If somebody can unmute, Paul and go next.

The question I think you partially just answered it actually, Luke. Just in terms of how you -- I mean, the market seems unwilling within your rating to sort of give you too much credit for performance fees. Therefore, in terms of deciding on the mechanism to returning excess capital, I think you just referenced the fact that it partly depends on where the share price looked as to whether a special or a buyback was the most appropriate mechanism. So just within your own assessment of fair value, I just wonder how you guys actually build performance fees into that assessment.

Sure. Why don't -- I mean, we both have our methodology. Mark has a very impressive multicolor model that estimated and I use a slightly more rudimentary rule of thumb. Look, performance fees are more volatile on any short-run period than management fees. That's correct. There's a mathematical equivalent to the different volatility which requires a small discount, if you look at that. If, on the other hand, you're looking over a 5-year window or longer, which is, I think what most investors say they're looking at, the reality is on a 5-year view, that the relative volatility actually dissipates really quite quickly. In any week, in any month, we can't predict what the performance fees are. But over 5 years, as we've demonstrated, they are very reliable.

Yes. And the other thing which is a statement of the blindingly obvious, but a management fee profit and a performance fee profit both turn into the same dollar of cash. And in the end, cash flows drive businesses over time. If the market continually allows us to buy back the earnings stream cheaply and therefore add value to continuing shareholders, we will keep doing it. And that is an extra source of value for people who see the same value that we see in the performance fee.

Cool. Thanks, Paul. And then David McCann.

David, are you there?

Okay. We'll come back to David. If somebody can unmute Gurjit, please. Gurjit Kambo from JPM.

Just a couple of questions. Just firstly, in terms of market like China, what's the Man Group doing there? You've had a couple of the other asset managers sort of set up joint ventures recently. So just on the sort of Chinese Asian markets, what the strategy is around that? And then secondly, just on ESG. Are you all then you have -- have you launched any sort of dedicated ESG fund? I know you'll be -- you're doing overlays on your funds. But is there any sort of dedicated ESG funds you're looking at? And then just finally on sort of M&A, what sort of areas are you looking for which perhaps organically is perhaps more difficult to do? So yes, any particular M&A areas that you're looking at.

So on China, so I guess, look, we have a very institutional business. Our model is built around that and about having where we deal with retail having distribution partners where we can rely on them to do all of the work around KYC, AML and so on and so forth. That restricts some of the things that we think is sensible to do in China, where you are giving over a lot of control into a market where people don't like to tell you where their money came from. And if you're regulated in the U.K. or the U.S. and you take money from Chinese people without knowing where the money came from, you are somewhat looking for trouble. As you know, we've had an onshore CTA running for, probably 6 or 7 years now. It's been very successful in terms of performance. And actually, last year was up about 60% net, I think. Markets where you have a lot of retail participation generally tend to create good opportunities for our quant strategies. And we are working hard to be able to distribute that content into the few large institutions you have in China where we have some decent relationships or to distribute them to offshore clients. On ESG, yes, we have a number of ESG-dedicated strategies. As I mentioned, we have $42 billion, I think it is, of -- where ESG is integrated. And we're working very hard on developing some interesting climate-related stuff using our quant processes.

And then on M&A, I mean, you'll have heard us say this before, but let me set it out again. So we're really focused on quality and fit with the firm. So things that don't overlap with capabilities we have today and things that are incremental value-add for our clients. So we don't go out sort of going. We must have this particular capability. We're focused on quality without overlap and cultural fit with the firm. So we talk to 100-plus businesses each year. That process goes on. It is a process. So to do it well, we think of it is something you have to be actively sourcing constantly to find good opportunities. But there's no particular obsession with it must be this. There's a key component that we want to add to the firm. It's about adding quality, diversification and things that are in the end value-adding for our clients.

Cool. Can we get on Hubert, please?

Yes. I've got 3 questions, please. Could I ask about the costs. You're guiding to about a 15% increase year-on-year in fixed costs. I was wondering if you could bridge the moving parts. And specifically, are there any COVID savings you made in 2020 that you're assuming are coming back in 2021? On the -- my second question is on the fee dynamics, if I can come back to that. Specifically, in the AHL product suite. What are the margins at which institutional money is coming on at? I'm just trying to work out if at constant mix you are seeing any change? And if you could give a bit of color as well on AHL target risk management fees, that could be quite -- helpful. And thirdly, in terms of the change in dividend policy. Now that you're moving to a progressive dividend, I'm wondering if you -- I mean usually companies seek to chat a bit of a buffer on the balance sheet and a bit of a grow dividend slightly lower perhaps than core management fees to try and buffer that progressive dividend. Is that something you're envisaging?

Sounds like it's all for you. Go ahead.

Yes. So I mean, on the cost side, the bridge is basically the stuff that I ran through earlier. So you've got a significant FX move at the current rate. So that's about $20 million of the move. And that's the single biggest component. We're assuming about $5 million from COVID-related costs, so travel and events rebounding. Obviously, that's an assumption, and we would think that, that would be second half-loaded as the world starts to open up. There are $6 million which is specifically around costs related to the space that we sublet within this office or main office in London, which as we mentioned in the half. That cost impact is really second half-loaded as well. And then the residual increase is the actual investment back into the business to support growth and taking the foot off and out of sort of some of the cost focus measures that we had through 2020 to protect profitability. On the margin side, so new money coming into AHL is actually coming in are pretty similar to the run rate blended amount. The mix effects you get tends to be, as I've mentioned before, some of the high feedback book rolling off. But there's not much of a difference between front book margins and average margins today. There's just still a -- some chunk of higher feedback booking around AHL diversified. And as we've said before, there's no real trend there other than a sort of gradual redemptions over time. But we don't see any accelerations to it. There's no fixed dates or anything like that. On total return target risk margin, I mean that's about a 70 basis point margin. So that's why it's moving the mix up over time. And as Luke mentioned, there's still continued demand from a very wide range of clients for that product and its broader family of products. And then lastly, on the dividend. So we -- I mean, buffer is not a word we would have in mind. We have both management fee earnings and performance fee earnings, both of which generate cash, both of which support the dividend. We don't subscribe to the view that the management fees stood only a reliable bit of the earnings. The performance trip fees are there reliably over time, certainly over a 5-year view, but even in the weaker years, performance through profits have been there. And we've obviously got a very strong balance sheet behind that. So don't think about the dividend changes being as I think the implication of the question is that you're going to receive less dividends over time but in a different form. We're expecting to pay out basically the same amount of dividends over time, and it's been about 60% of total earnings over the past 5 years. So some sort of reference there. But the form is different. The reliability is different. And that is designed to appeal more to shareholders and to reflect, a, the resilience of the business. We've just gone through a global pandemic with the business in remarkably good shape and actually stronger coming out of the year then going in. And b, the ability to grow that over time, which, again, you've seen various of the growth information in Luke's presentation earlier.

Cool. Thank you, Mark. Can we try David McCann again, please?

I did -- the question, I hope it's on the screen behalf but I'll read it out.

Yes. We're giving you the chance of your moment of glory.

Fair enough. Just on the new dividend policy action, Mark, that you quite answered. Then actually, I just wondered if there was any kind of target payout ratio. The question you actually -- did mention kind of 60%, broadly speaking. Just maybe any color there. Are you thinking about any split between management performance, I guess, given the products just now there may not be a distinction there? And/or is there any -- you obviously measure progressive. Is there any targeted growth, minimum growth rate, within that? That is the first question. And then the second question. Yes, on Slide 17, there's a number of interesting comments around kind of, I guess, the benefit of technology and your leadership position there. I mean obviously, it didn't really seem to help the asset weighted relative to the performance at least last year. So I guess, yes, obviously on a diversified basis across the group. So I guess, when could we expect to see some more tangible benefits of that coming through?

I'll take the second one, if you want to take the first.

Yes. Sure. So it's -- I mean, I'd say 60% just for reference, it's not a target payout ratio. It's a classic progressive dividend. And as we sort of set out in the policy, we're looking to grow it over time as the underlying earnings of the business grow. So we'll clearly set and announce it to the market in a normal way year by year. But it's designed to grow with that underlying earnings capacity. It's not specifically attached to either the management fee or performance fee side, it's the total earnings which support it and the total earnings which will grow it over time.

And in terms of the performance question. So as I mentioned, more than 100% of the underperformance last year came from Japan CoreAlpha. It was a shocking year for value in Japan. [indiscernible] Steve Harker, who's run that product incredibly, effectively for such a long time, and he's one of the great stalwarts of the industry, finally reached a point where he decided it was time to retire, maybe value had finally beat him up so much at the end of the year. And since then, we're seeing a value recovery. That product is designed in a very specific way to meet client requirements. It's done very, very well over the long run. We're very sure it will do very well over the future. But when value has a shocker as we did last year, you get these very, very big performances, big underperformances. And when you get some sort of a bounce, as we've seen in the beginning of this year, you get some very big rebounds. And the clients have been patient for that, but it makes a big difference to the overall percentage. I think when you look at the performance in things like AHL Alpha last year, which was clearly fully technology-driven and really delivered to clients and outperformed and that is a sense of the technology working. So -- but it also goes all the way through. One of the things, you have to remember in that period in March and April, there were so many opportunities to, frankly, to grow your leg off with the way markets were. And we think that being able to manage -- understand your risk is a great thing, but being able to manage it requires you to be able to change positions very quickly. We did over 4 million trades in March in order to change our positioning very significantly. And that was with, if you remember, in whatever it was, the second week of March, we shunted everybody home. And so suddenly, you had a whole set of people who never worked from home, having to manage 4 million trades and that we were able to do that without a blink, without any pickup in fail rate, without having to slow down our execution in any way, without having to change process at all. And to me, that is a real testament of what technology could do. And you've seen a number of people who weren't able to react quickly enough, who had business-critical losses last year, and I'm pleased to say we didn't have that at all. We've come through, I think, in a good way. Hopefully, that answered that. And I'm looking -- I think I haven't got anybody else with a hand up who hasn't been asked a question, but if you feel -- oh, sorry, Michael has just tapped up. So Michael Werner in the list.

Just a quick question probably for Mark. With regards to the dividend, how should we think about the interim versus final ordinary dividend going forward? Is there going to be some type of SKU? Any color there would be helpful.

Sure. So again, we'll anticipate being reasonably standard. So there tends to be a split across the market where the interim is a bit less than half of the total. And again, for us, given that the profitability tends to be slightly second half-weighted with the performance fee side, that fits with the cash flow. We're not giving specific guidance around the exact split, but I would think about it in those terms.

Cool. And what was the question? I saw briefly a question from Bruce. Bruce Hamilton, if you're on, can somebody go to Bruce and -- I think he had a question, or I'll ask it for you. Okay. It doesn't sound like we can unmute Bruce. But Bruce said, how optimistic on sales related to the Asia team are we? When do we expect this team's strategy to start fundraising? I would say it's a super high-quality team. We thought that in the interviewing process, they have a very, very strong reputation. I would say since the team has been here, we've only been impressed to the upside of what we expected. And I think clients' reactions have been very positive. Sort of how much will come this year against future years is always hard to see, but I would expect that we will start to see noticeable inflows this year. And with that, we've run a full hour. I think I've asked everybody to ask a question who put one in. I'm worried that the meter might run out after an hour. So I think we'll say thank you, everybody, for your time and attention. You know where we are if you have any more questions. And good luck out there. Thank you very much.

Thank you.