St. James's Place plc (STJ) Earnings Call Transcript

And I'll answer the question on the DB change. Look, I think firstly, it's important to remember that doing a DB transfer is not right for everyone. And in many cases, it would not be the right advice, but in other cases, it most definitely is a right advice. Not all of our partners are licensed to do this business. We have a high bar for acceptance, and all business is preapproved by our business assurance team, which is in independent to the partnership anyway. So a very high bar, and most cases, that go through business assurance will be approved. So do we expect there to be an impact. I'm sure there will be a small impact on this, but we don't expect it to be a large impact. I've also got Ian MacKenzie, who looks sort of after the advice guidelines on the call. And I might just ask Ian, if he'd like to add anything to that.

No, thanks, Andrew. I think that covered it quite well there. In terms of sort of where the partnerships are and the feedback we're getting from our advice policy perspective is that the changes will be embraced and indeed some partners who are specialists in this area see the changes in increasing their demand for the specialism, because the advice and the decision to consolidate your DB pensions into a DC environment is, for many of our clients and who are talking to the right advice for them and the right thing to do. And I would have to guess that a number of people on this call probably have done it as well. And I've been doing that journey. So it is appropriate financial planning, wealth management advice. And the partners are looking to embrace that going forward within the new constructs.

Thank you, Ian. Could we go on to the fifth question, please?

The next question comes from Colm Kelly from UBS.

First question is just on margins. Can you comment -- you commented on the net income cash margin on the average mature funds under management was within the guidance of 63 to 65 bps. Would you mind just telling us if the exact number for 1H, please? It's just the number I roughly calculated is falling slightly outside of that range, although clearly, I've less information to work with. The second question is on adviser growth. Clearly, this year will be a bit tougher for adviser growth, but -- even though the numbers are quite robust at half year. Do you think COVID-19 might help accelerate adviser growth in future years, given it has enabled SJP to showcase its digital capability and the value of the platform to non-SJP advisers? So I'd be interested in comments there. And then lastly, on recent press articles commenting on incorporating more passive funds within the fund offering. Just wondering if you could update on this. I suppose the current investment management process and selection process of actively managed funds is quite a core competitive advantage of SJP and somewhat differentiated and very central to the client value proposition. So it'd be interesting comments around any potential incorporation of more passive funds into that offer.

Good. Thank you very much. I'm going to pass the margin question over to Craig.

Yes, Colm, we weren't planning on disclosing the actual margin at any half year interim point. You'll be pleased to hear, though, that we did so last year for the full year, and we will do so for the full year for 2020. The amounts, as I've said in the presentation, was within that range for the first half. And the cluster of estimates that we had when we were gathering consensus was actually reasonably tight. So I'm pleased that the very least that the guidance we gave has enabled people to have a pretty good estimate of the income for the first half. And I have to say that's particularly credible given the level of volatility we've seen within funds under management. So that's probably what I would say on that.

Okay. Thank you. Ian, do you want to pick up the advisory recruitment point?

Yes. Colm. There's 2 or 3 things on this. The first one is during previous market dislocations, there is absolutely a flight to quality. And we are seeing inbound calls from people wanting to hear a little bit more about SJP's proposition, particularly how we've adapted during this period. So that's very positive. The second is that we can afford to be more selective. I think the issue of quality going forward is more and more important than ever before. It was -- always was important, but I think we can afford it to be higher up the hierarchy now, so we can be far more selective. And finally, there's -- there is a slight issue in the industry in terms of selecting people who are appropriate for our business and they're their own back-catalog and their own back book of business. My contain advice and issues that we're not too happy with. And so we have to turn them away. So it's -- there's lots of dynamics in there. But coupled with the success of the Academy and the success about us being able to place advisers in our successful partner businesses, I think the future is quite positive in that respect.

Thank you, Ian. I have Rob Gardner, who looks after our investments divisions. I'm just going to ask Rob to answer the question.

Thanks, Andy. So look, a couple of things to kind of set the context. I think the first thing is that on the passive, I was misquoted in the press. And let me sort of articulate what the plans are. So when I joined, one of the things I wanted to do was ensure that we have enough capacity in our MA to ensure that it's never a constraint to growth. So we've built a capacity model out to GBP 200 million, GBP 400 million, GBP 600 million and beyond. And as you know, based on our flows and our growth in our markets, over the medium to long run, we will grow to GBP 200 billion. So managing capacity in our fund is key. To put it into context, SJP, as an asset owner, is one of the largest asset owners in the U.K., and it's the same size as [ Texas Retirement ], so really trying to think like a long-term asset owner. The second big drive that you have seen from us is to position SJP really as the leading wealth manager in the U.K. around responsible investment and ESG. And so the key move this year was to increase of our managers all being signed up to UNPRI and the release of our carbon footprint. And so going forward, we're going to have 4 global equity building blocks. So we've got our global value, one; we're going to reprofile and have global growth and then global quality; and then the new fund is going to basically be a low-cost, but I'll come back to what I mean by low cost; RI integrated but low carbon. So a key thing within ESG is how do we lower the carbon footprint of our portfolios. Our global equity funds have about half the carbon footprint of the MSCI, and our goal is to continue to be able to pull clients who want to, to kind of flatten that carbon footprint and demonstrate that their financial well-being in a world worth living in is going to deliver in line with the Paris Climate Accord. And then in terms of asset management, this is not passive. We're using a technique called systematic, which is really using algorithms and AI and machine learning. And because of our size and scale, we can do this for about 10 to 15 basis points. The average external fund manager fee is about 39 basis points. So I suppose -- so what in all of that is that, that is not passive. In my mind, that is high capacity, low fee, low carbon fund, and that's the fund that was being talked about in the press.

Thank you, Rob. I'm conscious of time, so we'll try and take 2 more questions. So could we go to the next question, please?

The next question comes from Abid Hussain from Crédit Suisse.

I've got 3 questions, if I can. I know you're press for time. So the first one is just on the client interactions. I'm just wondering, in June and July, have you seen increased willingness for clients to take face-to-face meetings or even transact virtually? Just sort of more color on what you've seen since the easement of the lockdown, please? And then the second question was on your operational leverage. Thank you for the guidance on the 8% growth on the operational expenses. I was wondering if there's anything you could do further was there potential to reduce that expense growth below that, given the upturn on flows might be -- might be looking -- might not be as robust as we would like in the second half. And then the final question is on the fund performances. Could you just give us an update or any color if there is available on the individual fund performance versus your benchmarks on, say, 1-year, 3-year or 5-year basis, please?

Okay. Thank you, Abid. I'm going to ask Craig to pick up the operational gearing point. And of course, part of the expenses has to do with growth in adviser numbers as well, so we get interconnected questions here. But Craig?

Andrew stole of my first line. The question is quite specific, though. Is there something we can do? There's always something you can do, but there is then a question, should you do it? Because I would estimate over 2/3 of our cost base is sort of fixed in nature, it's property and people. And the overall framework that we have, which you see reflected in establishment expenses is all geared towards supporting the business as it stands today but also accommodating the future growth, which we've consistently achieved. So the challenge here is always to reflect on the cost base. But to ensure you can see through to the other side of whatever particular problem you may be faced with. And at the moment, I think we're all very clear that the next few months, and it could be the next 6 months, look very, very uncertain. But every time we've experienced something like this, whether it's this type of crisis or a financial crisis, there is another side, and you need everything in excellent shape in order to benefit from that. So I think there's a short-term and a long-term answer here. The way we see things at the moment, there's another side to this. And therefore, the guidance I've given remains the case, and that's 8% growth year-on-year with some benefit from the previous guidance I gave to reflect the fact that there is discretionary expenditure that can either be delayed or canceled. There's than a long-term question, and I can't really answer the long-term question. But needless to say, if something were to happen that really raised the question over that long-term growth potential, then we're no different to any other business. And yes, of course, there are things that could happen.

Thank you, Craig. And I'm going to pass to Rob again just on the fund performance point.

Yes. With the 9 portfolios, 39 funds and 70 sub strategies, I don't think I'm going to do the 1, 3 and 5-year performance. But I think a key thing to note is the average client with SJP invest in 8 to 10 funds. And those 8 to 10 funds are designed to meet the goals within the risk tolerance of that client. And remember, the key thing to financial advice is making sure that clients have a global allocation of equity funds and properties around the world. Now our funds that are global and growth-oriented have done very well. And you'll know that in the last 5 years, 2/3 of U.S. stock market performance has been driven by just the Fangs and Microsoft. And the U.S. market makes up over 50% of global stock market returns. So our U.K. managers that have a bias towards value have done poorly, but they have done in line with what we'd expect because they're U.K. and they're value based. Our alternative funds on our platform, again, haven't fared as well as we would have liked and they're funds that we're working on. So an overall level, and when we think about our funds in terms of the funds under management, our global growth funds have done very well in absolute and relative performance. And where we've got overexposure to U.K. or value that they've underperformed over the last 5 years, but that's in line with the benchmark that we set those for managers.

Thank you, Rob. And Ian will pick up the client interaction point and their partners.

Yes, Abid. I think -- I don't want to generalize here, but I think there's some interesting dynamics going on in the kind of psyche of clients at the moment. At the end of March, during the start of lockdown and the market correction, I think there's a lot of anxiety amongst clients, and they are levels of interaction with their advisers was high. I think if we go forward now, I would characterize clients as being far more reflective and are open to deeper conversations with their partners about their own life goals wanting to be more organized. And actually, what I would call a more reflective phase in this kind of weird world we're living in. They also have their own personal risk appetite in terms of whether they want to meet their partner remotely through a Zoom call or actually face-to-face, and partners are reporting high levels of desire for meetings. And some clients are more than happy to have those meetings face-to-face with clients, obviously, with social distancing, but in terms of wanting themselves to kind of have those conversations, they're keen to do it.

Thank you, Ian. And can we just take -- we're sort of over time, but we'll take one final question, please.

The last question comes from Oliver Steel from Deutsche Bank.

I'll keep it to 2. The first is your new business margin, the one that goes through the cash result. It was down 6% year-on-year against a 1% fall in gross flows. And I'm sort of surprised that it was down because last year, you said that the ratio for margin between the 2 effectively was down because of a fall in new business. So with new business much more level this year versus last year, I rather thought then you should have actually seen that ratio gets -- you should have seen a rising your business margin, not a falling one. Second question is on the growth in the agency numbers. It's up 1% year-to-date. Are you still seeing a circa 5% per annum retirement rate to the older partners? In which case, have we seen a sort of slight sort of mix shift towards younger, less experienced partners implicit within this calculation?

Okay. Thank you, Oliver. I'll pass to Ian first to do the growth in the agency and then that will leave Craig to finish.

Yes, Oliver. And well done on just making the cut there. I was pleased to hear your voice. In terms of the recruitment, we're not seeing any real trends of early retirements or older partners jumping off at the moment. We're not seeing that. We are seeing a greater number of youthful professional people wanting to come into the business. And as you know, the Academy and Next Generation has produced some great candidates, and it's been a driver of growth over the last 3 or 4 years for the business. I think next year, we'll revert back to normal growth levels. This year, it just didn't seem appropriate to be very active in recruitment at the start of the COVID period.

Thanks, Ian. And Craig, do you want to just pick up the operational gearing point in the new business margin?

Yes. And that's exactly what it is, Oliver. It is that operational gearing point with certain costs that are predetermined and, therefore, what I'd describe as short-term fixed cost. So with a 2% fall in gross flows, you begin to get a nonlinear comparison to some of the fixed costs that go into that calculation before any new business is written. And it's always the case that in periods where you have lower flows than you anticipated, that will be a cost. But for many years, it was a benefit, but not clearly visible because, obviously, both sides of that new business margin are very, very large figures.

Okay. I'm going to draw it to a close, everyone. So thank you very much for coming into the call. I think it's probably a bit of a new experience doing an investor presentation and call like this. So thank you. I'm sort of -- also apologies for anyone that had some questions, and we've run out of time, but do please contact Hugh or Tony with any outstanding questions, and we'll get back to you. So thank you, everyone.

This concludes today's call. Ladies and gentlemen, thank you for joining. You may now disconnect.