Man Group Plc (EMG) Earnings Call Transcript

I'm Luke Ellis, the CEO. This is Mark Jones, the CFO. I hope that you and all of yours have stayed safe, well and fully occupied through these times. We are both in the same room, but we are 2 meters socially distanced or as we call it around here, exactly one Mark Jones. As usual, I'll start with an overview of the first half of 2020. Mark will take you through the numbers, and then I'll talk about some of the developing trends in the sector and how we're positioned for them. Given how much this environment has affected all companies, I'm also going to talk about the strength and sustainability of our business, and finally conclude with the outlook before taking questions. I also want to welcome you to our first results presentation done on Webex. Certainly not the first of maybe the thousands of Webex, Zoom, Teams or whatever you've been doing for the last 4 months for all of us, but it is the first time for doing our results for us. In case you missed the instructions on the press release to ask a question, you need to access the presentation via the Webex link rather than the dial-in option. We are now 6 months into the COVID crisis, a crisis which has affected us all in different ways. I'm incredibly proud of my colleagues and the way they've responded magnificently to the challenges we've faced this year. Our priorities have remained firm throughout this period, and they are the health and well-being of our staff, the performance of our client assets through a very testing physical and market environment. As you all know, global markets were heavily impacted by COVID-19. We saw significant declines in most asset classes in Q1, followed by steep rallies as huge fiscal and monetary measures supported markets. During the second quarter rally, most markets, excluding the NASDAQ -- sorry, despite the rally, most markets, excluding the NASDAQ ended up in negative territory. Our funds under management decreased by 8% in the half to $108.3 billion, carried lower by beta to the equity markets in our long-only products and by a stronger U.S. dollar as we have so much non-U.S.-dollar-based business. We saw inflows into our alternative strategies, but overall an outflow driven by long-only strategies. We're very pleased to report a positive asset-weighted outperformance of 1.3% compared to our peers, which was driven by our alternatives and by our systematic long-only strategies. It was a better period for active management relative to passive overall. So the outperformance of our peers is even more important. Adjusted profit before tax decreased to $94 million, primarily due to the lower performance fees. Adjusted management fee profit before tax is actually up slightly at $86 million due to lower costs. Our balance sheet remains very strong and liquid, with net financial assets of $611 million. Drawing on this strength, the Board has proposed an interim dividend of $0.049 per share in line with our dividend policy and up slightly compared to our dividend of $0.047 per share last year. We are actually launching -- sorry, we aren't actually launching another buyback today. That was nearly new news. So we review the decision continuously based on market activity, our share price and the COVID environment. Funds under management decreased from $117.7 billion at the start of the year to $108.3 billion at the end of the first half. This decrease includes $1.2 billion of net outflows. As I said in our Q1 trading statement, we saw an increase in redemptions as some clients sought cash or adjusted allocations in response to COVID-19. In fact, our inflows were exactly in line with expectations. It was the increased redemptions that led to the net outflows. Over the half, we produced $1.3 billion of relative outperformance for our clients, offset by $6.7 billion of negative market moves, again predominantly driven by the beta and our long-only strategies. We also saw $2.8 billion of negative FX and other movements due to the dollar's strength, particularly against sterling. Inflows of $1 billion into alternative strategies in the first half were more than offset by outflows of $2.2 billion in long-only strategies. AHL TargetRisk, which has performed strongly in rising markets in recent years as well as protecting capital during the sell-off in the first half, was an important contributor to inflows in alternatives, together with our AHL Institutional Solutions offering in quant. Outflows were driven by Numeric Global and by GLG Japan CoreAlpha. Overall, we saw a 1.1% net outflows, outperforming industry flows for comparable strategies by 1.8%, reflecting the testing flow environment across the industry in the first half. There is a natural rhythm to institutional flows, and it's somewhat slower and out of sync with retail flows. On average, the institutional response function is to the last quarter and the last 12 months of their overall portfolio performance. As I flagged before, we saw a pickup in redemptions in Q2 as institutions reacted to their Q1 P&L, and they moved to create cash in their portfolios. Now they're looking at Q2 returns, I'm feeling more confident and so starting to look to invest that cash. The first 6 months of 2020 were characterized by unprecedented market volatility. In a period of 2 months, we experienced the fastest equity bear market in history, an oil price crash with negative futures prices at one point, the first steps in what is now a massive multitrillion dollar global stimulus, and then the onset of one of the sharpest equity rallies in history. We are pleased to have provided strong relative performance across most of our strategies over this period. A large part of our outperformance was concentrated around February and March, which was a particular value to our clients, and I think demonstrates the strength of the risk management across the firm and the ability to get our clients out of the way of trouble. Looking closer, the emerging market debt total return strategy was a particularly strong outperformer, gaining more than 9% in the half when its peers were losing money. They managed to avoid all of the defaults in emerging markets in this period. They even made money from being short [ Lebanon ] when that went. Value buyer strategies had a difficult time in the first half, however, which contributed to the underperformance we saw in the discretionary long-only category, where we have a couple of large, very value-oriented strategies. As you might expect, we have business continuity plans which are regularly reviewed and tested. But let's be honest. They didn't expect no access to any office globally, which is what we were faced. As the virus spread, we formed a dedicated response team in January, adapted our BCP program for the world we were facing, ran large-scale tests of our remote working technology and when the scope of the pandemic became clear, we implemented those plans for everybody working globally from -- working from home with minimal disruption. Since then, we've rolled out a number of new collaboration tools to ensure work productivity is maintained, which have been very widely adopted across the firm. I must say, I never thought I would be proud to say we have a firm where everybody is a slacker. Our engagement with clients has remained strong. Communicating in times of crisis is more critical than ever, and we kept our contacts despite the new environment. Normally, 3 quarters of material client engagement is done in person. In Q2, around 90% of those conversations were done virtually. We've got very good at these Webex, Teams, et cetera. And we expect that to last for some time. It's clear that most clients were not set up with the technology to cope aptly with the full work from home. In this environment, our existing clients have leant on us more than ever for help and understanding. And in fact, our U.S. quant conference was actually the best attended ever, with over 400 participants joining remotely. But it is harder to develop new dialogues with institutions where you don't already have a deep relationship until they are back in the office. On this slide, there are several examples of some of the positive actions we took to support our stakeholders. If I may, I'd like to highlight one in particular. Via the Royal Society, we answered the government's request for rapid assistance in modeling the COVID pandemic. We're very proud to have been selected to bring our programming of complex ideas and data science expertise and our computing power to bear to help with this challenge. It really wasn't good enough for the country to have its pandemic response modeled in Fortran with fixed parameters, and we felt that it was our social duty to commit resources to the effort to help correct that. We recently received the following feedback from Dr. Richard Reeve, joint lead of the Scottish COVID-19 Response Consortium which we were part of. The Man Group have made an extraordinary contribution to the consortium from specific work on individual models to higher-level work on the shared infrastructure that the consortium has developed on data management sensitivity analysis and inference. The Man Group team members have been extremely productive and valued members of our consortium. We're very grateful for their contribution. We obviously love quant. We talk about it a lot on these things. But it is nice to see that we can do not just good work for our clients, but also for society. So with that, I will pass it over to Mark and keep clicking.

Thank you, Luke, and good morning, everyone. As usual, I'll start with our P&L, and then I'll take you through more detail on FUM, revenue, costs and capital. Net revenues were $397 million, with $358 million of that from net management fees, 7 of sublease income and then $29 million of performance fees and $3 million of seed gains. Net management fees were 5% lower than 2019, mainly due to lower revenue margins. Product mix continues to drive this move, and I'll take you through all the normal details shortly. Performance fees were 77% lower than last year, reflecting the market environment in the first half. And in particular, the fact that AHL Evolution, which crystallizes in June only made small gains in the last 12 months. We eked out a small gain from the seed book, helped by the market rebound, some effective hedging and then some good alpha across various of the seed positions. Costs were lower, mainly due to lower bonus accruals, but also due to lower fixed costs and some benefit from weaker Sterling. Net finance expense was lower as well, as we switched to cheaper financing sources after calling our Tier 2 notes last year. You'll see some movements in adjusting items also. We've impaired the goodwill in relation to GPM, and there's an associated reduction in the earn-out liability there also. This reflects lower growth assumptions and the fact that the pipeline has been affected by COVID this year as clients have had to deal with issues in their existing portfolios rather than making allocations to newer strategies. There's also an upfront gain as one of our London subtenants has paid to exit their lease early, partially offset by a noncash deferred rent write-off. This is just drawing forward future rental payments. It's not increasing overall payments to us. So we're adjusting the recognition timing and adjusted profits to reflect that commercial reality. The accounting is a bit fiddly, but we've got details in the appendix for people updating models. Overall, the decrease in adjusted profits was driven entirely by the lower performance fees, with management fees up slightly year-on-year. Turning now to FUM. As Luke mentioned, FUM decreased to $108.3 billion. In Q1, we saw net inflows of $500 million. But as we previously highlighted, we saw a pickup in redemptions in Q2 as clients responded to the crisis. In general, we saw retail client redemptions spike a bit sooner than institutional clients, but client activity has normalized as we head into the third quarter. Absolute return FUM decreased to $29.1 billion. Net outflows were largely driven by redemptions from our discretionary long-short strategies. Despite many of our hedge funds having a positive first half, we had slight negative performance overall as some larger strategies declined, most notably AHL Dimension. Total return FUM increased slightly with net inflows of $1.7 billion being offset by negative FX and investment performance. Net inflows included more than $3 billion into TargetRisk with some outflows from alternative risk premia and EM debt total return. Multi-manager FUM reduced to $13.2 billion. Net outflows of $400 million were from some of our older fund of fund strategies. Systematic long-only FUM decreased by 14% to $23.6 billion, with equity market declines leading to negative investment performance and net outflows of $1.7 billion. Discretionary long-only FUM decreased also to $15.3 billion. This was again driven by equity market moves. The net outflows were predominantly from our Japanese equity strategy and some from our EM debt strategy. These were partially offset by inflows into credit and our growth-focused European strategy. Just as a reminder, most of our long-only strategies are focused outside of the U.S., whether that's Europe, Japan or emerging markets. We think those represent good alpha opportunities for our clients, but it does mean you should have global benchmarks in mind rather than the S&P or NASDAQ when you're thinking about how equity market moves might affect us. And turning now to revenue margins in the traditional slide. You can see some of the same trends that we've spoken about many times before, and then a couple of period-specific changes. Absolute return in multi-manager continued to trend down, driven by mix. Absolute return decreased by 4 basis points. That's the mix shift we normally remind you of towards institutional assets and then some redemptions from ELS in the period, which is a higher-margin strategy. Multi-manager dropped by a basis point due to the ongoing mix shift to lower margin infrastructure accounts. Turning to the couple of trends which are slightly different this period. Total return margin increased by 2 basis points. That's been reasonably constant prior to this. That reflects the strong growth in TargetRisk during the period, which is a higher fee strategy. And then you can see a larger move in discretionary long-only margin during the half. We've mentioned in the past that Japan is a higher fee strategy and the credit strategies tend to be lower fee. This period saw quite different growth trends between the 2. Japan's [ FUM ] declined from $6.6 billion to $3.1 billion. And at the same time, we saw good progress in building out our credit strategies, which grew by about $1 billion to $3.5 billion. That shift drives the majority of that 7 basis point decline in the run rate seen in the first half. Overall, core management fees fell by 4% to $358 million due to the revenue margin decline we just discussed. That drop is really driven by the long-only business. Alternative revenues actually increased by 4% compared to the prior year, driven in particular by the growth in total return. Moving on now to performance fees. The first half was obviously below average, and that weighed on performance fee profits in the first half, as you've seen. If you take the longer-term view, which we can obviously see here on the slide, firstly you can see that overall performance fee potential is still high, with performance fee-eligible FUM only slightly down in the last 6 months. You can also see the performance fee revenues can normalize rapidly with both 2017 and 2019 being above-average years following below-average periods in 2016 and '18. And there's no reason why we can't follow a similar pattern going into 2021. As I said earlier, for the first half, performance fees were $29 million. Those were mostly driven by AHL Evolution have been slightly quiet last 12 months. $18 million of those fees are from AHL compared with $116 million in the prior period. GLG earned $11 million of performance fees, mostly from our U.K.-focused hedge funds. Overall, you can see here, there's about $25 billion of performance fee-earning FUM that's either above, at, or within 5% of high-water marks. So as I said, performance fees can improve rapidly from here. Moving on now to costs. Variable compensation costs declined by 28%. Overall, our comp ratio was 50% at the top end of our guided range. That reflects the lower revenues and particularly lower performance fees in the period. Fixed cash costs were down 12% compared to the prior year. This decline comes partly from cost control as we saw revenues drop and responded, partly from FX benefits of weaker Sterling. And partly lower travel and marketing costs as a result of COVID. Overall, you can see that the lower costs have supported management fee profitability in the first half, but we've also consciously supported and invested in our people over this period to ensure that we're appropriately resourced through the current environment. And turning back just briefly to our office move. There's no impact on 2020 adjusted profits. For 2021, we expect a one-off hit of about $8 million. That's basically equivalent to the noncash deferred rent write-off mentioned earlier. If it weren't for that, we would expect no net impact. Post the sublet of that space, we expect no net impact to profits in the longer term. You can see the full detail in the back of the appendix to help with the model updates. I would just say that while we'll determine 2021 dividends at the time, we do view that $8 million as a one-off noncash impact and our inclination today would be to adjust our dividends up for that effect next year. Given the unusual environment we're in, we're not going to update 2020 cost guidance. But for the second half, please note that as we've said before, we've stopped hedging FX. So you'll have some Sterling translation effect on costs, and we'd expect some COVID cost reductions to normalize. In the long term, we continue to believe that managing the business efficiently remains critical for success in asset management. And now moving on to capital. As Luke said, we've got a robust balance sheet and liquidity position that allows us to weather the crisis smoothly and also to invest in the business. At the half, we had $611 million of net financial assets, including $202 million of cash. You've seen a lot of businesses need to address their capital structure this year across the U.K. and the world. We have continued as normal. That reflects 2 things: one, the strong cash flow generation of the business, but also some of the work we've done in easier times. Just as a reminder, last year we adjusted our corporate structure. We repaid our Tier 2 notes, and we entered into a new RCF, which meant we came into this year in a very strong position. As Luke mentioned at the start, our proposed dividend is $0.049 per share, in line with our normal policy. And lastly, before handing back to Luke, I'd like to remind you once again of one of the core strengths of our business. Since 2015, you can see we've returned an average of $285 million a year to shareholders. Those returns are driven by the profitability and cash generation of the business. In May, we completed the share buyback program announced last October. As Luke said, we're pausing capital returns for the moment, but our policy is unchanged. We pay out management fee profits as dividends. And then we've returned further capital over time historically via buybacks. We think pausing for now is in shareholders' best interests, but would remind everyone that we view capital allocation as a live discussion. It's not just an annual or semiannual matter for us. With that, let me hand back to Luke.

Thank you, Mark. And apologies for the pop-ups that appeared somewhere in the middle of that. I thought that I had shut them all down. I wanted to focus on 3 trends that are driving change in the investment management sector, despite whatever is going on, on COVID. And actually, these have been accelerated by COVID. Firstly, we think most institutional clients understand the need for material allocations to alternative strategies in their portfolios, and not just private market alternatives. Monetary response to the crisis have pushed interest rates even lower across the world, and central banks and governments seem committed to keeping them there for as far as the eye can see. Liquid alternatives provide a valuable source of return to investors, and they do so without increasing clients' equity exposures. And in some case, particularly with trend following, providing their best returns in periods like March. We're a global leader in liquid alternatives, have over 3 decades of experience with strong track records across a wide range of strategies. And this puts us in a prime position to capitalize on demand for alternatives. When the pandemic began, some speculated it might reduce companies' and investors' focus on ESG. I think it's very clear that actually the opposite has happened. Things have increased. The sustainability of a company's business model and capital structure are always critical to investors' long-run return. But many investors seem to have forgotten that permanently maximum financial and operational gearing is not a sensible long-run position. The crisis has been a very stark reminder of that fact. I'll talk later on about how we managed our firm for the long term. But as an asset manager, it's also critical for how we manage our clients' assets. At Man, we have an integrated approach to ESG, based on science and data rather than a bit of hand waving and fluff. Our framework encompasses all of our investment strategies and allows clients to choose the level of ESG integration that they want in their solution. We've taken our technology experience, our data science and investment know-how and have built proprietary ESG tools that are used every day by our PMs to measure and manage the ESG opportunities and risks in that portfolio. More on that in a minute. The third ongoing trend is technology as a differentiator in investment management. Technology-focused firms have clearly been able to respond so much more effectively in this environment, further accelerating trends that were in place beforehand. We are on the cutting edge in our use of machine learning, data science and with expertise in things like natural language processing. We have more than 500 highly skilled quants and technologists. Our employees come from more than 60 countries around the world. But here, we like to say that Python is our second language, with most people at Man being fluent in Python, and we're developing a program to introduce it to everyone else. It's been my lockdown homework. This is not something other firms can create in an easy way. The barriers to entry are real and significant, and our lead gives us a sustainable edge. A market crisis like the one spurred by COVID-19 tends to reveal which strategies are striving to deliver good risk-adjusted returns and which hedge funds are really just long-risk assets in a different wrapper. We think the absolute return nature of our strategies and the value of our risk management was demonstrated across our alternative strategies during the first half, where the majority of our key strategies were positive. They have all had solidly positive returns since inception. By providing a much-needed source of return with attractive risk characteristics, we see long run, steady and strong demand for alternatives from our clients and prospective investors. The end of hedge funds has often been predicted and has always been wrong. But it is clear that the alpha to the assets, and so the rewards in the hedge fund sector, are being more concentrated, more and more with the very large-scale players of which we are one, and pretty much Europe's only one. This slide is just a reminder of one of the hallmarks of trend following strategies, in particular, is that they perform strongly in times of market crisis. You can see here with AHL, one of our longest-running trend-following programs. It has generated positive returns during major market sell offs consistently over 25 years, including during February and March this year. It's clear that this crisis alpha effect is a very valuable component in most clients' diversified portfolios. We were a pioneer in trend-following strategies and due to our constant investment in research and innovation, we continue to lead the field, which has helped our clients profit in both rising and particularly falling markets. But it does take that constant investment to keep ahead of the market and the competition and to be able to harvest these returns. Responsible investing is of fundamental importance to us as a company and to our clients and the over 60 million pensioners and savers they represent. Long-term investment returns and social progress over time depend on sound stewardship of capital in managing investors' capital. And our approach to responsible investing ensures that our interests and our values are closely aligned with those of our clients and of our shareholders. We have a responsible investment framework, in which all of our funds operate to establish common values and standards and to define what we expect of our investment teams as they make it a more central part of their investment approach over time. Different clients have different perspectives on ESG, and we think it's important that we can deliver solutions that match their needs, while maintaining true to our core beliefs and those of our employees. You could see various illustrations of ESG in action within our business here, including our enhanced stewardship approach, our standardized ESG approach to reporting and our proprietary ESG analytics tool. I wanted to show you a quick example of this analytics tool, so this slightly gets to the bit where we want to cross our fingers, but I'm going to switch out of the presentation and into the tool, I hope. See. There we go. It's even working, and it's just going to reboot -- while we're doing it, always does something like that. So this is a tool which is available to all of our portfolio managers, and hopefully, it doesn't crash with Webex. This is a slightly we should -- yes. So I say, never work with animals, children and maybe technology in presentations, but it does normally work. Here we go. So this is a tool used by all of our portfolio managers, and it basically gives them information at their fingertips on their portfolio. So this is looking at a particular one of the portfolios, so you can see here, we could look up any particular portfolio, but we'll leave it on this one for now. That's good. And it gives ESG scores against benchmarks using the MSCI data, using Sustainalytics scores and using our own proprietary, which is developed by Numeric, our quant equities engine. You can see on this particular portfolio the numbers in red are the index and the numbers in black are the portfolio. You could see it is marginally better than the indices on almost everything. Over here, you see the portfolio and as a PM assuming it's going to work for us, you can click on any one of those things, and you'll see what is driving the information, what's driving those scores, whether good or bad, that gives you, at your fingertips, the chance to change things if you want to. As we come further down, can we get it to come down on the screen -- come on, be good to me. Okay. Not quite coming down. I should have practiced this a few more times, sorry. What -- can I go down? Okay. Well, we'll call that a bust then. Further down, what you could see, what the PM could see is the carbon score, they could see exactly how they voted on any particular issue, and -- here we go, quickly went down. There's the Carbon Score relative to TruCost Carbon. You come down, you could see momentum in those different factors, so they can see what's changing. Here, you could see how they voted in any particular thing. They can immediately look at where we voted against companies, where we voted against recommended -- so Glass Lewis or any of the other recommenders and see what's going on. And here, if there are issues in the portfolio, you can immediately see where the issue is coming from geographically, what the issue is. In this case, there's an ethics question on one of the stocks within the portfolio. And you can look straight down to seeing what it is that's driving that. So with that, and before it goes wrong again, I will jump back into the presentation. Here we go. Here we go. Not bad for a demo doing it live stream, 2 different systems. The culture is crucial to any organization. It defines who you are, it determines whether you succeed over time. We've put a lot of time and energy into making sure we're an organization where people feel they belong and could be proud to work and that reflect and embrace the values of the firm. While culture is intangible and hard to measure, you build it with tangible steps and actions. And in an environment like this, you can make a real difference. We've set out here a variety of things we're doing or we've achieved to give you a feel for our progress, and I'll highlight a few, in particular, to give you a better feel for who we are. We believe diversity of viewpoints and perspectives improve the quality of decision-making and of leadership. I'm really pleased that in adding 3 outstanding new nonexecutive directors this year, we now have a fully gender-balanced Board because I think it helps us make better decisions, provides better leadership, role models and mentors for people in the business. We're making progress across the firm more broadly with our gender balance, but we know we have a long way to go. We've got a range of actions and initiatives we're taking to help us get there. I mentioned our work with the U.K. government to model the pandemic earlier. But I wanted to come back to it here, as I think it's a great example of the firm taking our specific skills and contributing them back to society, where we work and where we live. We're not doctors or public health experts, but we have world-class modeling, programming and data science skills, and we were delighted to contribute in this way. One other example I wanted to highlight is we're investing in a strategy we're launching to build affordable housing in the U.K., typically in cooperation with local government authorities. The mismatch between the supply of affordable housing in the U.K. and the need for it is a major issue. The rate of affordable housing construction over the last 30 years or so is only about 1/3 of the need. The housing is often needed exactly by the key workers who have kept society functioning through the public health crisis this year. There are many ways in which we give back to our community. There's nothing more tangible than helping to build and manage housing for key workers. Something that brings together us, our clients and our community in this way, is just the sort of thing I think society is looking for public companies to deliver upon. The technology platform, which allows us to deal with the noise of ESG data, also allows us to address the explosion in alternative data available today. There are literally hundreds of sources of alternative data and thousands of data sets. They -- some of them have real value, many not. This slide gives you an overview of the resources required to evaluate claims and onboard data. The number of alternative data sets our data science team have onboarded continues to double year-on-year. I'll talk you through one example to show you what it means in practice. Online news and social media are important early indicators, especially for consumer brands. So we've developed a technology that monitor these online sources, continuously translating the text into English, and then into data and evaluating it for polarity -- is the story positive or negative -- and intensity, how strong is the signal. All of this using machine-learned natural language processing. If the sentiment score we compute drops sharply, it tends to lead to a sell signal, which allows us to position our client portfolios to profit and, of course, vice versa. The signal on individual companies may not always be that strong, but when combined within and across industries, you get an interesting source of alpha that can be extracted systematically. We use alternative data to support our discretionary managers as well. What I've shown on the right-hand side of this page is a snapshot of one of the tools we use. This one is called Mosaic. For once it's a tech system that says what it is, rather than some tortured acronym. It can be customized to the investment team and strategy, with as many different signals and data points, examples of which are on the left, on a stock as they find useful. This particular view here is sharing price momentum, earnings momentum, peer relative performance as traditional signals, as well as job postings, employee sentiment, search volume and app downloads as alternative data. Ultimately, this is all about getting the right information quickly and easily and displayed in an easily consumable way in front of the portfolio managers, to improve their decision-making. The last 6 months has put a tremendous amount of strain on many businesses, especially on those that have not been managed in a sustainable way. Excessive operational and financial leverage may boost profits in the short term, but the costs and risks of this approach come to the fore in times of stress, as the model has no resilience. We believe that Man's business is fundamentally resilient and strong for 3 key reasons. First, we have strong cash flow generation with low capital intensity. Secondly, we offer a diversified range of strategies, in particular with strategies that have a history of making money during selloffs. Finally, our balance sheet is strong and liquid with increased flexibility following the completion of the corporate restructure last year. The fact that we have a sustainable business model, and we manage the firm for the long term, has allowed us to focus on our employees and our clients in this time of stress. We manage the business for the long term in both good years and bad. We invest in our platforms, our people, and remain focused on risk management so that we can perform for our clients when they need us most. Before we open to questions, let me comment on our outlook. It was a challenging first half of the year for much of the world. I'm proud of how well we dealt with that, and that we did a good job for our clients and looked after our people. Looking forward, flow momentum, as Mark mentioned, is normalizing as we enter the second half as the post-pandemic bottom rejigging of institutional client portfolios seems to be over and now they have to start to try and put their cash to work. But we all know this is a stressed economic environment despite recent market performance. So there's plenty of room for change of volatility in the second half. Regardless of how things develop from here, it's the quality of our people and the technological expertise that we have, combined with our culture that really cares about our clients, that has and will enable us to succeed over the long term. So with that, as a reminder, if you want to ask a question, you would have needed to join the presentation via the Webex link in the joining instructions. On your screen, and these may vary by different device, but somewhere there should be a "press the raise hand" button to notify us that you'd like to ask a question. You'll automatically join the queue, and then we will take you off mute one by one to ask your question. So with that, I will open it up for questions and see what we've got in the queue.

So first on the list is Arnaud. If somebody can unmute Arnaud, there you go.

I see I've been unmuted. I hope you can hear me.

Yes, go ahead.

Great. I've got 3 questions, please. My first question is on costs. Clearly, costs have been better than expected on COVID-related savings. I was wondering if you could maybe quantify that -- any savings that you've achieved. I suppose the travel is not going to resume any time soon. So how long should we think that these savings are before things normalize? And my second question is on capital returns. So you've paused them for now. [Audio Gap] level of net financial assets at which you're comfortable to be at before thinking about resuming share buybacks? And thirdly, could you elaborate maybe a bit on potential product launches in the near future? I'm just wondering where you're seeing opportunities in a very low interest rate environment. And how you expect to address these?

Cool. Thank you, Arnaud. Mark, why don't you go first on the costs?

Yes. So I mean, on the cost side, you've got -- if you look at the move from the first half last year, say you've got some FX, which is about $8 billion. And then the remainder is split roughly half-half between COVID-related savings, so in particular, travel, but also marketing. And then the other half is cost control, across the business. You'll be surprised to hear that I am not the one person in the world who knows when COVID ends. So I can't tell you exactly when that's going to end. We're seeing minor pickups as bits of the world start to open up. But obviously, we expect some of that to persist through the second half at least. On capital returns, I think the point isn't that we need a particular level of net financial assets to do further returns. We've got a very strong balance sheet. We're more than capable of returning further capital today. We're choosing in the balance between prudence of balance sheet in the short run versus immediate returns just to focus on prudence for now. But I think as you've seen us announce capital returns at different points through the year, we discuss that topic regularly. And as I said in the script, it's not a -- we sit down at the interims of the full year and decide -- it's a live debate around what's the most beneficial thing to do with the capital [ list ].

On the question on product launches, one of the things we've tried to do is to wait until products have actually generated a critical amount of capital before talking about them here because we try to have a constant stream of product launches, looking at where we think we can add value for clients. Sometimes they work, sometimes they don't work. We don't think of the ones that don't work as a problem. We think that, that's part of the nature of product development. There are a couple of interesting things that are going on. We obviously announced or maybe the press announced that Andrew Swan is joining us at -- somewhere this week, I think even -- who's joining us from BlackRock, where he ran a very large amount of assets in Asian equities, and we're pretty excited by that. At the same time, we have developed a couple of what we think are pretty interesting quant programs which we're also hoping to roll out in the second half of the year. So we're constantly innovating things. We're constantly driving things, looking to make sure that we've always got good stuff in the pipeline looking forward. So with that, thank you, Arnaud. And if we can unmute Haley, who looks next on my list.

It's Haley from Crédit Suisse here. A few questions for me, please, just some simple ones. First of all, in terms of the fee margin dynamics, could you help us think about this maybe by telling us some typical margins for TargetRisk, Japan CoreAlpha and the discretionary credit strategies? Secondly, in terms of flow momentum normalizing, I just wondered whether there was anything in particular you're pointing to here or whether it was really just a stabilization of the unusually large gross redemptions you saw in Q2, I think, on Slide 32. And then I guess my final question is on global private markets. Obviously, you set out in the statement, the growth expectations have changed, and that's led to the write-downs that you've done. Also the impairments that you've done. What sort of time frame do you think about when you're looking at assessing the goodwill that should be held there? So help us think about the outlook perhaps of this business would be useful.

Sure. So let me take the fee margin point, and then I'll touch on the GPM goodwill stuff. So Japan is -- it's a very high-quality equity product so those are typically sort of 75-plus basis points margin. Credit is typically lower across the whole industry. So you'll normally see that more like 50 or 60, depends sort of by the particular product, but it's that sort of range. And TargetRisk has typically been around 70 basis points. So that's why it's sort of driving the mix effect up in total return. Just the technical bit on goodwill on duration. So this is the nerdy accounting bit. There's a 3-year forecast horizon and then a terminal value at the end. Obviously, we think about the business in a sort of longer-term fashion than that, but that is what drives the goodwill specifically. Do you want to add from that?

Yes. Look, I think we remain very committed to it. It's just the nature of what we've seen in private markets is clients have had significant amount of capital commitments drawn down during this period that for lots of clients has suddenly made them overweight things, which has just slowed down the number of new ideas they're looking at. And so that affected the projections that went into that forecast. I think from flow momentum point of view, yes, I think your characterization was pretty accurate. There's sort of -- the summer is always relatively quiet. But as we mentioned, the first half of the year, we saw gross inflows that were pretty much bang in line with our forecast coming into the year, internal forecast, we don't provide it externally. Redemptions were higher because of the COVID effect, that seems to have worked its way through. And so that's why we think the balance is back to what we consider more normal as we look at the second half of the year, assuming we don't get some extreme event again. With that, thank you, Haley. Chris Turner, if somebody can unmute you. And if I could just ask if Arnaud and Haley can put your hand down, if you can work out how to do that, that will help me see what's going on. Chris, you are unmuted, and over to you.