Half-year Report - Part 1 of 3

abrdn plc

Half year results 2021                                                                                   

Part 1 of 3

10 August 2021

 

Contents

 

1.	Management report	1
2.	Statement of Directors' responsibilities	19
3.	Independent review report from our external auditors	20
4.	Financial information	21
5.	Supplementary information	53
6.	Glossary	67
7.	Shareholder information	69
8.	Forward-looking statements	70

 

For a PDF version of the full half year results announcement, please click here:

http://www.rns-pdf.londonstockexchange.com/rns/0777I_1-2021-8-9.pdf

abrdn plc's LEI Code is 0TMBS544NMO7GLCE7H90

 

The Half year results 2021 are published on the Group's website at www.abrdn.com/hyresults

Details of forward-looking statements can be found on page 70.

Certain measures, such as fee based revenue, cost/income ratio, adjusted operating profit and adjusted profit before tax are not defined under International Financial Reporting Standards (IFRS) and are therefore termed alternative performance measures (APMs). Further details on APMs are included in Supplementary information in Section 5.

Standard Life Aberdeen plc became abrdn plc on 2 July 2021.

 

Strong start to the year, with progress on strategic priorities

Stephen Bird

Chief Executive Officer

"We have made a strong start to the year and our three-year growth plan.

These results, the first as abrdn plc, show a 52% increase in adjusted operating profit. Each of our three growth vectors have delivered higher revenue and profits, contributing to the highest overall rates of growth since the merger.

Our strategy is about focusing on client needs. The improved flows into our strategically-important products and services show that we are answering client demand. The majority of the outflows that we are seeing are lower margin.

Low interest rates and central bank interventions have created supportive market conditions from which we have benefited. Market volatility is expected to continue due to COVID-19 and its unequal effects in different parts of the world.

We have made good progress in simplifying and focusing our business. The leadership team is now in place to drive the growth we seek through our strategic priorities. Our capital strength gives us the ability to invest in these priorities.

We have a clarity of focus under our new brand and are better positioned to have impact at scale as a global business. We are at the beginning of the journey and we are moving at pace to build our new future."

Half year results 2021

Strong start to the year, creating momentum for our growth ambitions

·      Fee based revenue 7% higher and adjusted operating profit 52% higher than prior year which are the highest rates of growth since merger.

·      Net outflows reduced to £5.6bn, including liquidity net outflows of £3.7bn. Excluding liquidity flows, which are volatile, net outflows were £1.9bn representing a significant improvement over prior periods and less than 10% of outflows at the low point in H2 2018.

·      Consequently the impact on revenue from net outflows (excluding LBG) is less than 0.5% compared with 3% in H1 2020.

·      AUMA of £532bn (FY 2020: £535bn) broadly flat as reductions due to flows and corporate actions were partially offset by positive market movements.

·      Delivered improved operational leverage with cost/income ratio of 79%, 6ppts lower than prior year.

·      Higher adjusted operating profits in all vectors - 61% higher in Adviser, 33% higher in Investments and Personal has recorded a small profit for first time.

·      IFRS profit before tax of £113m, reflecting higher adjusted operating profit and significantly lower impairments than H1 2020.

·      Adjusted diluted EPS of 7.0p is 3.7p higher, benefiting from the increase in adjusted profit after tax and the share buybacks in 2020.

·      Adjusted capital generation increased by £73m to £176m, reflecting strong profit performance.

·      Strengthened capital position with surplus regulatory capital increasing to £2.8bn (FY 2020: £2.3bn), including £0.7bn benefit from sale of 4.99% in HDFC Life.

·      Interim dividend of 7.3p in line with our dividend policy.

Good progress in our growth vectors

·      Gross flows (excluding liquidity) in Institutional and Wholesale were 21% higher than H1 2020 at £20.0bn.

·      Institutional and Wholesale has seen best net flows performance (excluding liquidity) since merger of (£0.8bn).

·      Liquidity gross flow in Institutional and Wholesale reduced from £9bn in H1 2020 to £2bn in H1 2021 reflecting client response to volatile markets.

·      Strong client demand for private markets¹ investments drove net inflows to £3.2bn, a 10-fold increase on prior year.

·      Investment performance is 66% of AUM above benchmark over three years (FY 2020: 66%).

·      Strengthened ESG product offering with launch of range of SFDR Article 9 climate funds.

·      Adviser net flows increased to £2.0bn (H1 2020: £1.1bn), the highest flows in three years. Launched new adviser experience programme to accelerate our market-leading position.

·      Personal had record net flows of £0.5bn with Aberdeen Standard Capital reaching record AUMA of £8.7bn.

Simplified the business, investing to focus on strategic priorities and client needs

·      Changed company name and rebranded to abrdn plc in July.

·      Achieved major milestone in investment platform integration with over 1,300 portfolios and c£460bn of AUM migrated onto one investment platform in July. Remain on track to deliver targeted £400m of synergies by end 2021.

·      Continued to simplify the business by completing sale of Parmenion and Nordics real estate business and exiting from the Indonesian market.

·      Modernised our real assets franchise by completing the acquisition of a majority interest in Tritax.

·      Simplified and extended our strategic partnership with Phoenix as announced in February.

 

	H1 2021	H1 2020	Change
Financial indicators
Fee based revenue	£755m	£706m	7%
Cost/income ratio	79%	85%	(6ppts)
Adjusted operating profit	£160m	£105m	52%
Adjusted capital generation	£176m	£103m	71%
IFRS profit/(loss) before tax	£113m	(£498m)
Adjusted diluted earnings per share	7.0p	3.3p	112%
Diluted earnings per share	4.7p	(22.7p)
Interim dividend per share	7.3p	7.3p
Business indicators
Gross flows	£36.0bn	£38.2bn	(6%)
Net flows	(£5.6bn)	(£24.8bn)
Net flows excluding liquidity and LBG2	(£1.9bn)	(£6.8bn)	72%
AUMA	£532bn	£535bn3	(1%)
Investment performance (AUM) - 3 years4	66%	66%3

¹    Private markets comprises real assets, private equity, private credit and alternatives.

²   Excluding Institutional and Wholesale liquidity net flows of (£3.7bn) (H1 2020: £6.9bn) and LBG tranche withdrawals of £nil (H1 2020: £24.9bn). Liquidity flows are low margin and volatile in nature. LBG tranche withdrawals relate to the settlement of arbitration with LBG in 2019.

³    At 31 December 2020.

⁴    Percentage of AUM above benchmark over three years. Further details on the calculation of investment performance are provided in Supplementary information.

Outlook

·      Outlook remains unchanged as set out in our full year 2020 results in March.

·      Arrest revenue decline in near term, inflecting to a high single digit three-year revenue CAGR over the period ending 2023.

·      Target to exit 2023 at cost/income ratio of c70%.

·      Disciplined approach to capital allocation with a focus on building returns for shareholders.

·      Rebased dividend of 14.6p per annum until adjusted capital generation reaches 1.5x cover.

 

Media

A conference call for the media will take place at 7:45am (BST) on 10 August 2021. To access the conference call, you will need to pre-register at https://cossprereg.btci.com/prereg/key.process?key=PQJ8XB894

 

Investors and analysts

A presentation for analysts and investors will take place via webcast at 8:45am (BST) on 10 August 2021. To view the webcast live please go to www.abrdn.com. There is also the facility to join the presentation and subsequent Q&A session via a conference call.

 

For further information please contact:

Institutional equity investors and analysts

Catherine Nash	07798 518657
Helen Rennardson	07554 010422

Media

Andrea Ward	07876 178696
Iain Dey (Edelman Smithfield)	07976 295906
Latika Shah (Edelman Smithfield)	07950 671948

Retail equity investors

Equiniti

* 0371 384 2464

Debt investors and analysts

Graeme McBirnie

01313 727760

* Calls may be monitored and/or recorded. Call charges will vary.

 

Chief Executive Officer's statement

We're creating the future, starting now

 

Creating momentum for growth

At our full year results in March we outlined our strategy to return the business to growth. It is a client led strategy, focused on the three growth vectors of our business: Investments, Adviser and Personal.

We set near term goals to put us on the right path towards our financial targets - arrest the decline in revenue, and improve our operating leverage. We have made a strong start towards achieving those two objectives.

We have delivered the highest rates of revenue and earnings growth since the merger with fee based revenue 7% higher at £755m, adjusted operating profit 52% higher at £160m, and a 6ppts improvement in our cost/income ratio to 79%.

IFRS profit before tax improved to £113m due to the increase in adjusted operating profit and significantly lower impairments than the prior year.

Market conditions have been supportive, particularly when viewed against the same period last year.

We are at the start of our growth journey and there is clear evidence of our progress. For example, in relation to investment flows:

·      Our overall business drove a 72% improvement in net flows from (£6.8bn) to (£1.9bn) and within that our Investments vector delivered a 48% improvement from (£8.8bn) to (£4.6bn)¹.

·      Adviser net flows in the first half already equal the full year 2020.

·      Personal had its record net flows in the first half.

 

We still have considerable room for improvement. When it comes to investment performance, for example, there are areas of standout performance, such as China A shares. However, we are not yet delivering consistent performance in all of our strategies and we are tackling this head on.

The clarity of focus that we are bringing to the business is reflected in our new brand. We have launched abrdn as our new single global brand and are progressing through a phased roll out programme. All core client facing touchpoints will be completed by the end of the year.

¹    Excludes Institutional and Wholesale liquidity net flows and LBG tranche withdrawals.

The new unified identity replaces five previous brands, each of which were supported by individual marketing costs. We are now better positioned to have impact at scale, as a global business.

We are taking bold, clear actions across our three businesses. We have the right people in the right roles. And we have the financial firepower to match our ambitions. We are investing in each of our three businesses in order to accelerate our growth. It is through this disciplined investment that we will drive the returns our shareholders expect.

Our leadership

The first six months of the financial year has seen the build out of the new management team tasked with driving growth in the business. Our new operational structure creates clear lines of responsibility and accountability, aligned to the objectives for each of the three vectors.

·      Caroline Connellan is joining us as CEO of Personal Wealth.

·      Noel Butwell is CEO of Adviser.

·      René Buehlmann joined as CEO Asia Pacific (Investments) in March.

·      Chris Demetriou has started his new role as CEO UK, EMEA and Americas (Investments).

Investments

Our business can only grow if the Investments vector is performing. It is our biggest and most important business. To create long-term momentum in Investments, we need to ensure that we are developing product lines aligned to the fastest areas of growth in the industry.

In the first six months of this year, we have had a particular focus on Asia, private markets and ETFs.

Asia is both a global destination for investment, and home to a large and growing institutional and retail savings market. With René Buehlmann's arrival, our Asian strategy is therefore focused on three broad themes:

·      Accelerating distribution in the region with a strong wholesale focus.

·      Strengthening our leading Asian investment expertise, in particular around sustainability.

·      Focusing on improving distribution of global products to regional clients.

We have a strong global reputation for our Asian asset management capabilities with £46bn under management in long-standing strategies such as China A shares, Asia Pacific Equity and Frontier Markets Bond Fund.

We are proud to have won recognition for our successful China A shares strategy which has attracted a total of $5bn AUM since launch in 2015.

In terms of Asian distribution, our focus on developing wholesale is yielding results. We have taken a big step forward through a new partnership with Citibank. abrdn products are now available on Citibank's recently launched digital banking and investment platform in Hong Kong and will shortly become available in Singapore and the US.

Private markets and alternatives are a central plank of the abrdn growth story. As a result of a strategic review of our capabilities in this high growth asset class, we have tightened and modernised our focus. We are bringing together our real estate and infrastructure capabilities under a £37bn AUM real assets franchise within Institutional and Wholesale. The acquisition of Tritax is a great example of our ambitions in real assets, bringing with it exposure and expertise in the fast-growing logistics and e-commerce real estate market. Since we completed the purchase in April they have had a successful fund raising beating their target by over 10%.

Private credit is one of the highest growth areas of private markets and we have seen consistent growth in our business. We plan to grow the business further through our relationship with Phoenix and expand our geographic capabilities. Private equity will be managed and built as a discrete global business.

Within alternatives our US precious metals ETF franchise has seen strong growth since we bought into the market three years ago, with AUM almost trebling to c$7bn. ETFs have been one of the biggest drivers of industry wholesale flows in the US and we are now expanding our suite of products in the US and internationalising into Europe including a new industrial metals fund aligned to the global 'electrification' theme.

Adviser

We were again ranked the number 1 UK adviser platform for AUA and gross flows in Fundscape's Q1 2021 report. We continue to develop our offering to meet the needs of our IFA clients, helping them do more for their customers. 

In May, we announced an adviser experience programme which will bring a series of new features, advice solutions and technology enhancements that will be delivered throughout 2021 and 2022.

Our push to drive the business further will accelerate in the second half, as we brand the platforms business under the abrdn name. This will coincide with the launch of a new adviser interface with simplified navigation and interactive dashboard.

Personal

Our discretionary fund management business delivered a strong performance hitting record AUMA of £8.7bn and the strongest ever first half for net inflows.

Caroline Connellan will be joining us to lead Personal Wealth later this year. She will be instrumental in driving our personal wealth strategy and we will invest in this vector to bring it to relevance and scale in the UK.

We are accelerating our technological capabilities in Personal through the agreement to purchase EXO Investing Limited (EXO). EXO's automated ETF-based wealth management proposition, driven by artificial intelligence, will help abrdn develop an industry-leading technology solution for investors.

The products and services we offer through our discretionary asset management and financial planning businesses will be rebranded under the abrdn name in the second half of the year.

Investing responsibly

We have joined the Net Zero Asset Managers initiative group supporting the goal of net zero greenhouse gas emissions by 2050 or sooner. We also accelerated our own climate change commitments to achieve a 50% reduction in operational emissions by 2025.

Following our compliance with EU SFDR level one we are converting our range of SICAV funds to comply with SFDR Article 8 and 9. We expect a four-fold increase in converted funds in the next 12 months to around 80 funds. In July we launched a suite of climate funds aimed at supporting clients' shift to net zero with equity, bond and multi-asset funds in the range.

Finishing transformation and simplifying the business

In July we completed the migration of over 1,300 portfolios and over £460bn public markets AUM onto one global investment platform. This major technological milestone, which was a huge cross-functional effort, allows our investment teams to focus wholly on investment performance and outcomes. The remaining elements of transformation are on track. We have delivered £382m of annualised synergies by the end of H1 2021 and are on track to meet our target of £400m by the end of the year.

During the first half we successfully completed the sales of the Nordics real estate activity and Parmenion, which raised proceeds of c£100m. We also closed our Indonesian office. This all allows us to focus our efforts and resources in the areas of greater growth potential.

Investing to grow

We have a strong capital position. As at 30 June 2021, our regulatory capital resources were £3.9bn - including £0.7bn from the sale of a further 4.99% in HDFC Life.

This gives us the capacity to invest more in our business to accelerate growth. Each of the three growth vectors has a distinct investment plan.

For Investments we will invest in further embedding advanced data analytics in our investment process and in closing the performance gap to best-in-class; building our business in Asia; increasing our private markets capabilities, and growing seed capital to fuel our wholesale channel.

In our Adviser vector we will continue to invest in the technology needed to support our adviser experience programme. Key to this is making our platforms even easier for advisers and their customers to use.

For our smallest vector, Personal, we have been clear that growth will be through further acquisitions to get scale. We also need to invest in technology to grow our direct-to-consumer (D2C) savings and wealth offering.

We will be disciplined in the deployment of capital.

Our working environment

Our people have largely continued to work from home so far this year and the further lifting of COVID-19 restrictions in the UK is positive news. This gives us the green light to take the next step in moving away from the default of 'home working' towards a new phase in our working arrangements. We are really looking forward to welcoming colleagues back into our offices. Our offices will remain our primary place to go when we need to physically interact with colleagues to collaborate, connect and coach. Outside the UK, we continue to follow government guidance across our global regions regarding the return to office approach. I want to thank all our people for their continued resilience and determination to serve our clients well in these challenging circumstances.

Looking forward

Our outlook is the same as we provided in our full year 2020 results in March. We are aiming to improve our operating leverage by arresting revenue decline in the near term, inflecting to a high single digit three-year revenue CAGR over the period to 2023. In the medium term costs will grow, reflecting a more variable base to track performance. As stated in March, we are targeting to exit 2023 at a cost/income ratio of c70%.

We take a disciplined approach to capital allocation with a focus on building returns for shareholders. Dividends have been rebased to a sustainable level of 14.6p and we intend to grow the dividend once it is 1.5x covered by adjusted capital generation.

abrdn's new client led growth strategy is rooted in understanding client outcomes, driven by their needs, wants and aspirations. Our new brand symbolises the transition underway to bring clarity of focus, a renewed sense of purpose and the drive for sustainable growth for shareholders, clients and colleagues.

We are at the start of the journey. At abrdn we are building a new future, starting from now.

Stephen Bird

Chief Executive Officer

10 August 2021

Performance overview

 

Analysis of profit	H1 2021 £m	H1 2020 £m
Fee based revenue	755	706
Adjusted operating expenses	(595)	(601)
Adjusted operating profit	160	105
Adjusted net financing costs and investment return1	3	(13)
Adjusted profit before tax2	163	92
Adjusting items including results of associates and joint ventures2	(50)	(590)
IFRS profit/(loss) before tax	113	(498)
Tax expense	(11)	(6)
IFRS profit/(loss) for the period	102	(504)

Our IFRS profit before tax increased to £113m. This improvement includes the benefit of higher adjusted operating profit in the current year, and the impact in the prior year of losses on impairments of goodwill and intangibles of £1,049m. Adjusted operating profit of £160m increased by 52% largely due to higher revenue, as markets and flows both improved.

 

Segmental performance3	Adjusted operating profit		AUMA		Net flows
	H1 2021 £m	H1 2020 £m	H1 2021 £bn	FY 2020 £bn	H1 2021 £bn	H1 2020 £bn
Investments	126	95	457	457	(8.3)	(1.9)
Adviser	37	23	72	67	2.0	1.1
Personal	4	(4)	14	13	0.5	0.1
Corporate/ strategic	(7)	(9)	-	8	0.3	0.6
Eliminations			(11)	(10)	(0.1)	0.2
Total (excluding LBG tranche withdrawals)	160	105	532	535	(5.6)	0.1
LBG tranche withdrawals					-	(24.9)
Total	160	105	532	535	(5.6)	(24.8)

¹   Capital management has been renamed Adjusted net financing costs and investment return.

²   Adjusted profit before tax now excludes the share of profit from associates and joint ventures. Comparatives have been restated. See Supplementary information for more information.

³   Segmental performance in this report is now shown on a vector basis. 2020 comparatives have been restated on this basis. See further details in Note 4.3 and in Supplementary information.

Investments

 

	Total		Institutional and Wholesale		Insurance
	H1 2021	H1 2020	H1 2021	H1 2020	H1 2021	H1 2020
Fee based revenue1	£613m	£581m
Adjusted operating expenses	(£487m)	(£486m)
Adjusted operating profit	£126m	£95m
Cost/income ratio	79%	84%
Fee revenue yield	26.3bps	25.8bps	39.4bps	39.3bps	10.1bps	11.0bps
AUM2	£457bn	£457bn	£252bn	£252bn	£205bn	£205bn
Gross flows	£31.1bn	£34.7bn	£22.0bn	£25.5bn	£9.1bn	£9.2bn
Redemptions	(£39.4bn)	(£61.5bn)	(£26.5bn)	(£26.1bn)	(£12.9bn)	(£35.4bn)
Net flows	(£8.3bn)	(£26.8bn)	(£4.5bn)	(£0.6bn)	(£3.8bn)	(£26.2bn)
Net flows excluding liquidity3	(£4.6bn)	(£33.7bn)	(£0.8bn)	(£7.5bn)	(£3.8bn)	(£26.2bn)
Net flows excluding liquidity and LBG3,4	(£4.6bn)	(£8.8bn)	(£0.8bn)	(£7.5bn)	(£3.8bn)	(£1.3bn)

¹   Includes performance fees of £22m (H1 2020: £12m).

²   Comparative as at 31 December 2020.

³   Institutional and Wholesale liquidity net flows excluded.

⁴   Flows excluding Lloyds Banking Group (LBG) do not include the tranche withdrawals of £nil (H1 2020: £24.9bn) relating to the settlement of arbitration with LBG.

 

Investments financial indicators in the half year period

·      Fee based revenue was 6% higher than H1 2020 as a result of the benefits from favourable market levels on AUM, a diminishing impact on revenue from net outflows, improved yields and a £10m increase in performance fees. Performance fees of £22m in this period were primarily generated from emerging market equities and real assets.

·      Adjusted operating profit was £31m (33%) higher than prior period, reflecting higher revenue and overall costs being held flat. As a consequence the cost/income ratio improved to 79%, 5 percentage points (ppts) lower than prior year.

 

Institutional and Wholesale indicators

·      Fee based revenue before performance fees was 8% higher (H1 2021: £490m, H1 2020: £454m) reflecting growth in all asset classes except fixed income and multi-asset.

·      Revenue yield remained broadly stable at 39.4bps.

·      Headwinds were evident in fixed income and multi-asset revenues where, in contrast to equity market growth, bond markets weakened as inflationary pressures have fuelled an increase in bond yields.

·      In this period, there was a diminishing impact on revenue from the impact of net outflows. This reflects 82% of the net outflows being liquidity which are lower margin. The volatility in this asset class reflects corporate clients using their cash balances through the pandemic period.

·      Net flows excluding liquidity improved by £6.7bn to (£0.8bn). In particular there were £3.2bn of net flows into private markets.

·      Sales activity in terms of gross flows excluding liquidity (H1 2021: £20.0bn, H1 2020: £16.5bn), increased by 21%. Liquidity gross flows reduced from £9bn to £2bn after the exceptional inflows in 2020. Our pipeline remains strong, with mandates awarded not yet funded of £4.2bn including fixed income, liquidity and multi-asset.

 

Insurance indicators

·      Fee based revenue before performance fees at £101m (H1 2020: £115m) is 12% lower than prior year, mainly reflecting the impact of the LBG exits in 2020. The remaining withdrawals of c£34bn of LBG assets are expected to complete in H1 2022.

·      The revenue yield also reduced in this period reflecting the higher margin LBG exits, particularly fixed income and multi-asset.

·      There are typically net outflows to meet underlying policyholder requirements from the existing book of business. We support our insurance clients to develop their open book, particularly in the bulk purchase annuity market and defined contribution pension schemes. In this half year period, the level of new bulk purchase annuity activity completed across the market was lower.

·      Sales activity in terms of gross flows was broadly flat. The pipeline of mandates awarded not yet funded of £4.1bn, includes fixed income, quantitative and equities.

·      The primary client, Phoenix, represents 83% of the Insurance AUM.

 

Investment performance¹

% of AUM ahead of benchmark
 

·              1 year: 65%	(FY 2020: 71%)
·              3 years: 66%	(FY 2020: 66%)
·              5 years: 65%	(FY 2020: 68%)

 

¹   Calculations for investment performance are made gross of fees except where the stated comparator is net of fees. Further details about the calculation of investment performance are included in the Supplementary information section.

 

Three-year investment performance is 66% of AUM covered by this metric ahead of benchmark (FY 2020: 66%).

·      Equity performance weakened over one, three and five years with 65% (FY 2020: 74%) of AUM ahead of benchmark over three years. The underperformance in European and Japanese equities reflects challenging market conditions for the long-term quality investing approach. This is partly offset by the outperformance in our key franchises in Asia and Emerging Market equities.

·      Multi-asset performance has fallen slightly in this period, with 31% (FY 2020: 33%) of AUM ahead of benchmark over three years. We delivered improved performance in MyFolio and our absolute return mandates continue to deliver outperformance against benchmark over one, three and five years.

·      Performance in fixed income, liquidity and alternatives remain strong. Real asset performance improved benefiting from repositioning in Real Estate portfolios.

 

Adviser

	H1 2021	H1 2020
Fee based revenue	£87m	£69m
Adjusted operating expenses	(£50m)	(£46m)
Adjusted operating profit	£37m	£23m
Cost/income ratio	57%	67%
Fee revenue yield	25.3bps	23.1bps
AUMA1	£72bn	£67bn
Gross flows	£4.6bn	£3.2bn
Redemptions	(£2.6bn)	(£2.1bn)
Net flows	£2.0bn	£1.1bn

¹   Comparative as at 31 December 2020.

 

Adviser indicators in this half year period

·      Fee based revenue at £87m is 26% higher than prior year, reflecting a £12m benefit for the half year period from reduced charges with effect from 1 January 2021 following simplification of the arrangements with Phoenix, and the benefit of higher flows and market levels.

·      Average assets are £69bn, 15% higher than prior year.

·      The revenue yield overall has increased reflecting the benefit of the new arrangements with Phoenix which more than offset the impact of the repricing completed in 2019 and 2020.

·      Adjusted operating profit at £37m was 61% higher than prior year. The resulting cost/income ratio improved by 10ppts to 57%.

·      Flows in this channel have been strong such that the net flows in H1 2021 already equal the full year net flows in 2020.

·      Our platforms retained our number one position on gross flows² as sales activity increased by 44% on prior year.

·      AUMA increased to £72bn through the combination of increased flows to the platform and higher markets. This represents an increase of 8% since 31 December 2020.

²    Source: Adviser platform gross flows, Fundscape Q1 2021.

 

Personal

	H1 2021	H1 2020
Fee based revenue	£41m	£38m
Adjusted operating expenses	(£37m)	(£42m)
Adjusted operating profit/(loss)	£4m	(£4m)
Cost/income ratio	90%	111%
Fee revenue yield	55.9bps	56.1bps
AUMA1,2	£14bn	£13bn
Gross flows	£1.0bn	£0.6bn
Redemptions	(£0.5bn)	(£0.5bn)
Net flows	£0.5bn	£0.1bn

¹    Comparative as at 31 December 2020.

²    Includes assets that are reflected in both Aberdeen Standard Capital and Advice businesses. This impact (30 Jun 2021: £1.2bn) is removed within eliminations.

 

Personal indicators in this half year period

·      Fee based revenue at £41m is 8% higher than prior year, including the benefit of increased customer activity across the market. There has also been a 6% increase in Aberdeen Standard Capital client numbers to c15,000 benefiting from the relationship with 1825.

·      The revenue yield overall has remained broadly stable with average assets of £14bn, 11% higher than prior year.

·      The vector has made a small profit this period, largely reflecting a one-off benefit of c£3m. Excluding this one-off benefit, the underlying performance is £5m higher than prior year at £1m. The resulting cost/income ratio improved to 90%.

·      Flows in this channel were strong such that the gross flows have increased by 67% compared to H1 2020 and net flows are at record levels for Aberdeen Standard Capital and 1825.

·      AUMA is 8% higher in the half year, reflecting the higher net flows into the business and higher market values.

 

Corporate/strategic

 

	H1 2021	H1 2020
Fee based revenue	£14m	£18m
Adjusted operating expenses	(£21m)	(£27m)
Adjusted operating loss	(£7m)	(£9m)

 

This segment comprises certain corporate costs (c£7m in H1 2021) and the Parmenion and SL Asia businesses which were held for sale. The sale of Parmenion completed in June 2021 and the sale of SL Asia completed in June 2020. The adjusted operating loss was broadly stable at £7m. Following the completion of the sale of Parmenion this segment will comprise only certain corporate costs in H2 2021.

 

Overall performance for half year to June 2021

Improved operating leverage from both revenue growth and management of costs

 

·      Adjusted operating profit: £160m

·      IFRS profit before tax: £113m

·      Adjusted capital generation: £176m

 

Fee based revenue

The revenue increase of 7% to £755m (H1 2020: £706m) reflects:

·      Positive impact from markets.

·      Increased performance fees.

·      Diminishing impact from net outflows excluding LBG to less than 0.5% compared to 3% in H1 2020¹.

Adjusted operating expenses

Costs decreased by £6m to £595m (H1 2020: £601m) reflecting:

·      Reductions in non-staff costs of £11m, including savings on outsourcing costs, travel and premises, offset by inflation and FX impacts.

·      Higher staff and other related costs of £5m, reflecting increased accruals for variable compensation and inflation, partially offset by lower staff numbers.

·      Cost/income ratio improved to 79% (H1 2020: 85%).

¹   Reflects the estimated impact on fee based revenue as a result of net outflows in both the current and prior period, as a percentage of prior period revenue.

 

Synergies

·      By 30 June 2021, actions have been taken which are expected to deliver £382m of annualised synergies, benefiting H1 2021 operating expenses by £157m (H1 2020: £137m) with further benefits expected in H2 2021.

·      We remain on track to meet the overall synergy target of £400m in 2021.

·      Costs incurred to date to deliver these synergies are £542m, of which £27m were incurred in H1 2021
(H1 2020: £46m). These costs are included within restructuring expenses and our estimate for total costs relating to these synergies remains at £555m.

Adjusted net financing costs and investment return

Adjusted net financing costs and investment return generated a profit of £3m (H1 2020: loss £13m) from:

·      Investment gains of £5m (H1 2020: losses £17m) including seed capital and co-investment fund holdings.

·      Increased net finance costs of £11m (H1 2020: £6m) reflecting a lower rate of return on cash and liquid assets.

·      Net interest credit relating to the staff pension schemes of £9m (H1 2020: £10m).

 

Adjusting items including results of associates and joint ventures

 

	H1 2021 £m	H1 2020 £m
Profit on disposal of interests in associates	68	651
Profit on disposal of subsidiaries	84	8
Restructuring and corporate transaction expenses	(113)	(131)
Amortisation and impairment of intangible assets acquired in business combinations and through the purchase of customer contracts	(51)	(1,124)
Change in fair value of significant listed investments	(72)	-
Dividends from significant listed investments	35	-
Other	32	-
Adjusting items	(17)	(596)
Share of (loss)/profit from associates and joint ventures	(33)	136
Loss on impairment of interest in associates and joint ventures	-	(130)
Total adjusting items including results of associates and joint ventures	(50)	(590)

 

The profit on disposal of interests in associates of £68m relates to a one-off accounting gain following the reclassification of our Phoenix shareholding from an associate to an investment measured at fair value. This reclassification resulted from the changes to the commercial agreements announced in February 2021. See Note 4.13. Our shareholding in Phoenix remains at 14.4%. The H1 2020 profit of £651m related to the sale of shares in HDFC Life and HDFC Asset Management (see Note 4.2).

Profit on disposal of subsidiaries of £84m primarily relates to the sale of Parmenion which completed on 30 June 2021. See Note 4.2.

Restructuring and corporate transaction expenses were £113m, primarily reflecting ongoing transformation costs for integration, separation from Phoenix and implementing our simplified operating model. Total Phoenix separation costs accounted for to date amount to £300m and include £18m in H1 2021. Our estimate of the total of these one-off separation costs we expect to incur remains £310m.

 

The amortisation and impairment of intangible assets acquired in business combinations and through the purchase of customer contracts reduced to £51m as there were no impairments in H1 2021, compared to impairments of goodwill and customer relationship intangibles of £1,049m in H1 2020.

The change in fair value of significant listed investments of (£72m) represents the impact of movements in the share price on our holdings in HDFC Life during H1 2021 and in Phoenix from 23 February 2021, and the impact of our stake sale in HDFC Life in June 2021.

Dividends from significant listed investments relates to our shareholdings in HDFC Life and Phoenix that were previously associates and were reclassified on 3 December 2020 and 23 February 2021 respectively. Following the reclassification, dividends received are now recognised as income within our financial statements. H1 2021 of £35m relates to dividends received from Phoenix.

Other adjusting items of £32m include a £25m net release of deferred income. See Note 4.16.

 

Share of (loss)/profit from associates and joint ventures

The share of (loss)/profit from associates and joint ventures reduced to a loss of £33m (H1 2020: profit £136m).

	H1 2021 £m	H1 2020 £m
Phoenix	(56)	83
HDFC Life	-	10
HASL	10	13
HDFC Asset Management	14	32
Virgin Money UTM	(1)	(2)
Share of (loss)/profit from associates and joint ventures	(33)	136

The Phoenix loss to 22 February 2021 resulted from investment return variances from equity market and interest rate rises and is more than offset by the £68m gain on reclassification discussed previously.

The lower share of HDFC Asset Management profit was mainly due to H1 2020 including a one-off tax benefit of £18m. The reduction in HASL was due mainly to lower profits on group business sales in H1 2021.

Impairment of associates and joint ventures

The impairment of associates and joint ventures was £nil (H1 2020: £130m). H1 2020 impairments are discussed in Note 4.13.

 

Tax expense

The total IFRS tax expense attributable to the profit for the period was £11m (H1 2020: £6m), including a tax credit attributable to adjusting items of £2m (H1 2020: credit £7m), resulting in an effective tax rate of 10% on the total IFRS profit (H1 2020: negative 1%). The difference to the UK corporation tax rate of 19% is mainly driven by:

·      Revaluation of elements of the Group's deferred tax balances due to future UK tax rises.

·      Dividends received from our investment in Phoenix not being subject to tax.

·      One-off gains on disposal of subsidiaries where the taxable gains were less than the accounting gains.

·      Fair value movements in significant listed investments not being subject to tax.

 

The tax expense attributable to adjusted profit is £13m (H1 2020: £13m). The effective tax rate on total adjusted profit is 8% (H1 2020: 14.1%). This is lower than the 19% UK rate primarily due to the future increase in the legislated rate of UK corporation having a beneficial effect by increasing the value of our deferred tax assets.

Assets under management and administration (AUMA) and flows

	H1 2021 £bn	H1 2020 £bn	FY 2020 £bn
Opening AUMA	534.6	544.6	544.6
Net flows	(5.6)	0.1	(3.1)
LBG tranche withdrawals	-	(24.9)	(25.9)
Market and other movements	9.0	(8.0)	19.0
Corporate actions	(6.2)	-	-
Closing AUMA	531.8	511.8	534.6

Our corporate actions in H1 2021 reflect our focus on simplifying and enhancing our capabilities to meet future client demand:

·      Sale of Parmenion which simplifies our platforms business, reducing AUM by £9bn.

·      Sale of our domestic real estate business in the Nordics region removing complexities from our business. This transaction reduced AUM by £3bn.

·      Acquisition of majority interest in Tritax to strengthen our combined offering in the growing logistics real estate market, supplementing AUM by £6bn at the acquisition date.

 

Capital and liquidity

Adjusted capital generation

Adjusted capital generation of £176m remains closely aligned with adjusted profit after tax as shown below.

	H1 2021 £m	H1 2020 £m
Adjusted profit after tax1	150	79
Less net interest credit relating to the staff pension schemes	(9)	(10)
Add dividends received from associates, joint ventures and significant listed investments	35	34
Adjusted capital generation	176	103

¹   Adjusted profit after tax now excludes the share of profit from associates and joint ventures. Comparatives have been restated. See Supplementary information for more information.

Net movement in surplus regulatory capital

Capital indicators in this half year period were:

·      Increase of £0.7bn from the sale of a 4.99% stake in HDFC Life in June 2021.

·      Increase of £0.1bn from the sale of Parmenion.

·      Reduction of £0.2bn from the acquisition of Tritax.

·      The resulting position was a further strengthened capital surplus of £2.8bn.

·      The majority of the value of listed stakes is excluded from the capital position.

·      Adjusting for the expected impact of the Investment Firms Prudential Regime (IFPR), the indicative pro forma regulatory capital surplus is c£1.7bn at 30 June 2021.

Surplus regulatory capital less an appropriate buffer is the key measure of available resources, rather than cash.

Analysis of movements in surplus regulatory capital	H1 2021 £bn	H1 2020 £bn	FY 2020 £bn
Opening surplus regulatory capital	2.3	1.7	1.7
Sources of capital
Adjusted capital generation	0.2	0.1	0.3
HDFC Life and HDFC Asset Management sale proceeds	0.7	0.7	0.9
Parmenion sale proceeds	0.1	-	-
Uses of capital
Restructuring and corporate transaction expenses (net of tax)	(0.1)	(0.1)	(0.2)
Dividends	(0.2)	(0.2)	(0.3)
Acquisition of Tritax	(0.2)	-	-
Share buyback programme	-	(0.4)	(0.4)
Other	-	-	0.3
Closing surplus regulatory capital	2.8	1.8	2.3

 

The Group's capital resources include c£0.8bn from holdings in insurance entities that it is expected will no longer be eligible following the implementation of the IFPR from 1 January 2022. The IFPR is also expected to introduce constraints on the proportion of the minimum capital requirement that can be met by each tier of capital. As a result, it is estimated that c£0.3bn of existing Tier 2 capital, whilst continuing to be reported within the Group's capital resources, would not be available to meet the current minimum capital requirement from 1 January 2022.

Cash and liquid resources and distributable reserves

Cash and liquid resources remained robust at £2.2bn at 30 June 2021 (FY 2020: £2.5bn) which excludes the net proceeds from the HDFC Life share sale which settled on 1 July 2021. These resources are high quality and mainly invested in cash, money market instruments and short-term debt securities. Further information on cash and liquid resources, and a reconciliation to IFRS cash and cash equivalents, is provided in Supplementary information.

At 30 June 2021 abrdn plc had £2.0bn (FY 2020: £2.1bn) of distributable reserves.

IFRS net cash inflows

·      Net cash outflows from operating activities were £128m (H1 2020: inflows £52m) which includes outflows from restructuring costs, net of tax, of £97m (H1 2020: £89m). Outflows were higher in H1 2021 due to working capital movements.

·      Net cash inflows from investing activities of £243m (H1 2020: £776m) with the reduction primarily due to 2020 including proceeds from the HDFC Life and HDFC Asset Management stake sales.

·      Cash outflows from financing activities of £260m (H1 2020: £572m) with the reduction reflecting lower dividends paid in the period and the 2020 share buyback.

The cash inflows and outflows described above resulted in closing cash and cash equivalents of £1,202m as at 30 June 2021 (FY 2020: £1,358m).

IFRS net assets

IFRS net assets were broadly stable at £6.7bn (FY 2020: £6.8bn) with dividends paid in the period partly offset by profits.

·      Intangible assets increased to £0.7bn (FY 2020: £0.5bn) as a result of the Tritax acquisition, partially offset by amortisation. Further details are provided in Note 4.12.

·      The principal defined benefit staff pension scheme, which is closed to future accrual, continues to have a significant surplus of £1.5bn (FY 2020: £1.5bn). Further details are provided in Note 4.15.

·      Financial investments were stable at £3.2bn (FY 2020: £3.1bn) with the £1.0bn increase from the Phoenix reclassification from an associate to an investment, being largely offset by the £0.7bn sale of HDFC Life and lower holdings of certificates of deposit. Financial investments also include holdings of £252m(FY 2020: £277m) in newly established investment vehicles which the Group has seeded and co-investments of £84m (FY 2020: £86m).

Earnings per share

Adjusted diluted earnings per share increased by 112% to 7.0p (H1 2020: 3.3p) due to the 90% increase in adjusted profit after tax and the benefit from 2020 share buybacks. Diluted earnings per share increased to 4.7p (H1 2020: (22.7p)) reflecting the factors above and the impact in the prior year of losses on impairments of goodwill and intangibles.

Dividends

As disclosed in the Annual report and accounts 2020, it is the Board's current intention to maintain the total annual dividend at 14.6p (with the interim and final both at 7.3p per share), until it is covered at least 1.5 times by adjusted capital generation, at which point the Board will seek to grow the dividend in line with its assessment of the underlying medium term growth in profitability.

The Board has accordingly declared an interim dividend for 2021 of 7.3p (H1 2020: 7.3p) per share which will be paid on 28 September 2021 to shareholders on the register at close of business on 20 August 2021. The dividend payment is expected to be £154m.

Adjusted capital generation in the half year of £176m, was 1.14 times the dividend payment.

The adjusted capital generation trend and dividend coverage is shown below:

H1 2020: £176m at 0.65x the dividend
H2 2020: £159m at 1.02x the dividend
H1 2021: £176m at 1.14x the dividend

 

Principal risks and uncertainties

The principal risks that we believe the Group will be exposed to in the second half of 2021 are the same as those set out in the Annual report and accounts 2020 comprising: Strategic risk; Financial risk; Conduct risk; Regulatory and legal risk; Process execution and trade errors; People; Technology; Business resilience and continuity; Fraud and financial crime; Change management; Third party management and Financial management process.

Key developments in relation to our principal risks

The progress made in simplifying the business is leading to an overall reduction in operational risk and strategic risk in particular. That said, developments in the external environment continue to create new challenges.

The move to a unified brand addresses a key strategic risk that has existed post-merger and the sale of SLAL to Phoenix. Effective execution of the rebrand is central to our future success and we are focused on developing strong brand identity and a dynamic and cohesive culture across the firm.

COVID-19 continues to impact ways of working. With vaccination roll-out now well advanced in the UK and internationally, we are working on a cautious, phased return to office and using new ways of working to benefit our customers and clients and our people.

Short-term operational challenges continue as we approach completion of our transformation programme. Progress is on track but risks have been elevated by COVID-19 impacts on some key third parties.

We maintain heightened vigilance for cyber intrusion and financial crime, with dedicated teams actively monitoring and managing cyber security risks as they evolve, with the support of external specialists.

As a global active fund manager we are working hard to integrate climate change and ESG considerations in our investment activities, noting that the proliferation of new standards internationally, particularly on disclosure and reporting, presents market-wide implementation challenges.

We continue to monitor the evolving UK/EU relationship, given the potential for disruption to cross-border portfolio management delegation and the certainty of growing regulatory divergence over time.