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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| River And Mercantile Group Plc | LSE:RIV | London | Ordinary Share | GB00BLZH7X42 | ORD GBP0.003 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 49.40 | 50.00 | 51.00 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMRIV
RNS Number : 3734S
River and Mercantile Group PLC
11 March 2019
LEI: 2138005C7REHURGWHW31
River and Mercantile Group PLC
Interim Financial Report for the six months ended 31 December 2018
River and Mercantile Group PLC, the advisory and investment solutions business today publishes its interim results for the six months ended 31 December 2018.
Financial highlights
-- Adjusted profit after tax(1) was GBP8.4m, compared to GBP9.6m for the six months ended 31 December 2017 as higher revenues in the current period were offset by the cost of investments(2) , and the cost of external research provision post-MiFID II.
-- Statutory net profit after tax was GBP6.7m, compared to GBP9.1m for the six months ended 31 December 2017. The prior period contained a GBP1.8m accounting credit resulting from the bargain purchase of the ILC team.
-- Statutory basic and diluted earnings per share (EPS) were 8.40 pence per share and 8.08 pence per share, compared to 11.34 pence and 10.53 pence respectively for the six months ended 31 December 2017.
-- Adjusted basic and diluted EPS(3) were 10.49 and 10.09 pence per share, compared to 11.99 pence and 11.13 pence respectively for the six months ended 31 December 2017.
-- The Board of Directors have declared an interim dividend of 6.3 pence per share, of which 2.0 pence is a special dividend and relates to net performance fees. The dividend will be paid on 12 April 2018 to shareholders on the register as at 22 March 2019. The ex-dividend date is 21 March 2019.
Jonathan Dawson, Chairman said:
"No investor should be surprised when I write that the first six months of our financial year were challenging ones for markets. Despite this, I am glad to report that our business has performed creditably, in particular the diverse nature of our revenue exposures demonstrating our defensive characteristics against equity market weakness.
Our results in the period reflect our investment where we see opportunities, including our continued development of outcome-oriented solutions to long-term client needs and continuing to make selective hiring of senior staff to strengthen our advisory and distribution capabilities."
Mike Faulkner, CEO said:
"Whilst this has been a difficult period for markets and a more muted one for the Group as a result, our overall AUM/NUM has proved comparatively resilient to negative equity market returns, as we would expect. We are delivering close to 30% margin on our business before investments, and are choosing to invest meaningfully in growth opportunities which we see. This does however have an impact on our margin when considered in total.
We have an active product development pipeline, which we believe can be a significant source of future growth and is therefore strategically important.
I continue to believe we are strongly positioned to keep growing. Opportunities in markets that should emerge in the near and medium term will offer us a chance to continue adding value for our clients and in doing so to significantly increase AUM/NUM."
Investment highlights
-- Fee earning AUM/NUM increased by 1% during the six months to GBP34.2bn; and by 5% from 31 December 2017.
-- Net inflows in the period (including rebalance) were GBP1.3bn. -- Performance fees for the period were GBP6.5m.
Operating highlights
-- Net management and advisory fees were GBP32.6m, an increase of 3% over the six months ended 31 December 2017, due to the continued growth in AUM/NUM.
-- Adjusted underlying pre-tax margin(4) was 24%, compared to 25% in the year ended 30 June 2018 and 27% for the six months ended 31 December 2017. Removing the effect of investments(3) the figure for the period was 29%.
A PDF copy of the interim financial report can be found at: https://riverandmercantile.com/docs/RandM_2019_Interim_Results.pdf
Notes:
(1) Adjusted profit comprises total revenue, remuneration expense, administrative expenses, depreciation, amortisation of software, realised gains or losses on seed investments, and finance income or expense.
(2) Investments in the ILC team, New York and Australian offices, and new product development and launches.
(3) Adjusted EPS is the adjusted profit after tax divided by the weighted average number of shares outstanding in the period, either including or excluding those which are dilutive(-) .
(4) Adjusted underlying profit is a measure of the core performance of the Group, as this is adjusted profit excluding performance fees (and remuneration associated with those performance fees).
Forward-looking statements
This announcement contains certain forward-looking statements with respect to the financial condition, results of operations and businesses of River and Mercantile Group PLC. These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report. However, such statements should be treated with caution as they involve risk and uncertainty because they relate to events and depend upon circumstances that may occur in the future.
There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. The continuing uncertainty in global economic outlook inevitably increases the economic and business risks to which the Group is exposed.
Nothing in this announcement should be construed as a profit forecast.
For further information please contact:
Chris Rutt
Deputy CFO
+44 (0) 203 327 5100
Interim Financial Report
Six months ended 31 December 2018
Chairman's statement
In the six months to 31 December 2018, River and Mercantile Group delivered statutory profit before tax of GBP9.0m (2017: GBP11.0m), adjusted underlying profit before tax of GBP7.9m (2017: GBP8.5m) and statutory basic EPS of 8.4 pence (2017: 11.3 pence). We are declaring an interim dividend of 6.3 pence per share, of which 2.0 pence per share is a special dividend relating to performance fees, consistent with our policy of distributing at least 60% of adjusted profit.
No investor should be surprised when I write that the first six months of our financial year were challenging ones for markets. The threat of significant trade disputes between the two largest global economies during the period, a difficult domestic and international political climate, and an uncertain economic outlook combined to deliver significant falls in equities across the world. Despite this, I am glad to report that our business has performed creditably, in particular the diverse nature of our revenue exposures demonstrating our defensive characteristics against equity market weakness.
Our results in the period reflect our investment where we see opportunities, including our continued development of outcome-oriented solutions to long-term client needs and continuing to make selective hiring of senior staff to strengthen our advisory and distribution capabilities. This investment has incurred GBP1.9m of cost versus revenue at this stage of only GBP0.7m, leading to a lowering of overall profit margin.
We will continue to invest in our growth where hiring and other opportunities exist. This is also the case for our new Australia office where, based on our existing client relationships and our investment experience to date, we believe that there are valuable opportunities for us. As ever, of course, we will be careful to ensure that we do not expand faster than our management, systems and operational capacity will permit.
In February, the FCA concluded its competition investigation, imposing a penalty against the Group's subsidiary RAMAM LLP of GBP109,000 - in line with our previous guidance to the market. While we are glad to put this matter behind us, the Board continues to be focussed on conduct and ensuring that the Group upholds the highest standards at all times.
We have taken note of investor feedback on our current remuneration policy, and intend to begin a process of engagement leading towards a future changed policy.
Outlook
Whilst the global outlook remains hard to predict, I am confident that our business, with its clear focus on understanding and meeting our clients' needs, and delivering investment outcomes supported by excellent investment solutions, is well placed both to meet the challenges of current markets and to maintain resilient performance.
Jonathan Dawson
Chairman
8 March 2019
Report of the Chief Executive Officer
I would like to take this opportunity to update you on a number of areas since the 2018 Annual Report:
-- Revenue and AUM growth;
-- Investment performance, including my view on markets;
-- Product development; and
-- Investment opportunities and Group profitability.
Revenue and AUM/NUM growth
Our strategic target is to grow revenue organically by at least 12% per annum. In the first quarter, we grew AUM/NUM by 3.3% overall. In the second quarter however, our AUM/NUM fell as a result of negative investment performance. Whilst the impact of markets (-3% on opening AUM/NUM) was much less pronounced than most peers and the actual moves in the equity markets themselves, it still slowed the growth rate below our target in the short-run.
The implication over the six month period is that assets grew slightly, by 1% to GBP34.2bn.
Within this overall increase Equity Solutions Institutional AUM grew strongly. Falls in Equity Solutions Wholesale AUM have led to a small drop in our overall management fee margin, but one that is consistent with our typical range in recent years, as shown in the chart below.
Please click on link to see chart
http://www.rns-pdf.londonstockexchange.com/rns/3734S_1-2019-3-8.pdf
This means that, during the period, our in-force revenue has fallen slightly (by around 3%). Nonetheless, in the market conditions we have preserved value, and the performance of assets since the end of the reporting period has been positive.
Overall, I believe this result supports statements we are making about how we are growing the business. Simply put, if we can deliver stable investment returns, win new clients and retain existing clients because they are highly satisfied, the business will grow well. More specifically, there are three positives I take from our results.
First, in spite of these challenging market conditions, we have still produced over GBP6m of performance fees in the period. This is testament to the combination of preserving value this year so far and having achieved strong returns in previous years in Fiduciary Management, coupled with excellent returns produced by George Ensor and the team in our UK Micro Cap Investment Company.
Second, we continued to see strong demand from our institutional equities clients despite market conditions, with net sales of GBP0.7bn for the quarter and GBP1.2bn for the half. This is a testament to our outcome-orientated approach to solving real client needs, which means that clients understand the role our strategies play in their portfolio, which leads to a continued ability to distribute in falling markets. It also results in low attrition (our regretted institutional attrition for the period was only 1%). The net effect of continued positive sales and low attrition is our distribution result in the last six months is consistent with our long term experience, as shown in the chart below.
Please click on link to see chart
http://www.rns-pdf.londonstockexchange.com/rns/3734S_2-2019-3-8.pdf
Third, we have previously talked about the defensive qualities of our business compared to many of our peers, using our Revenue Weighted Asset Attribution metric to show how over a third of our revenue is independent of market moves. This diversification has led to a more muted exposure to significantly falling equity markets - only a 3% overall fall in AUM/NUM.
The chart below places this investment performance result in the context of our track record in delivering growth in AUM from this factor. While the period has seen a loss, I believe we are still relatively well placed to end our financial year with the result being a positive one.
Please click on link to see chart
http://www.rns-pdf.londonstockexchange.com/rns/3734S_3-2019-3-8.pdf
If we are able to continue delivering around 8% per annum in net sales ratio, around 7% through return generated on assets by investment performance and rebalance and achieve this with stable margins we will grow management fees at 15% - in excess of our 12% objective.
I turn next to our expectations for both investment performance and product development and I will then address how we are investing for future growth to accelerate distribution above its historical level.
Investment performance
Underpinning the way in which we help clients frame their investment decisions is our "Four Phase" approach. I explained the background to this in my last report for the year-ended June 2018. But as a quick re-cap, the four phases are as follows:
-- Generalised upward re-rating - most risk asset classes rise at the same time. This phase always occurs from markets being cheap.
-- Stable conditions - economically everything is at least ok, credit conditions are generally supportive and markets are neither very cheap nor very expensive.
-- Apprehension - markets are expensive yet still keep on rising, generally supported by credit conditions.
-- Downturn - markets fall, or get ready to do so and this is generally coupled with worsening credit conditions and/or poor economics.
In my last report, released in September 2018, I identified that we believed we were in a "Downturn". This view had influenced the advice given to clients and also the positioning of Fiduciary Management and macro portfolios. This view clearly turned out to be correct and we saw significant equity and credit market falls during the following period. The defensive nature of these portfolios is also a reason why our exposure to the downturn in markets was more muted.
The dynamic nature with which we are able to manage portfolios is also supportive of delivering long run investment performance at a Group level. In early January, we made a decision to re-allocate to risk assets, particularly equities, and as a result have benefited more from the subsequent rise in markets so far during 2019 than we lost in 2018.
Looking out, we believe that while the economic risks may persist, the environment is broadly supportive of risk assets and also that this should be a good year for our value strategies. At this stage, my best guess is that the investment performance contribution for our financial year 2019 will be positive to a small degree, and that in the next few years there will be strong returns from equity markets, particularly in Asia and Emerging markets. Our value equity strategies have certainly started well, as have our Fiduciary and Global Macro strategies.
Later in this interim report we include a table showing the investment performance of our strategies and I would like to highlight some key points.
You can see that our performance in the past 12 months has been negative (mainly arising in the last quarter), most significantly in Equity Solutions. As these are long-only equity strategies this is not surprising. However, you will also notice that whilst our performance relative to benchmarks remains excellent over the longer-term, we are running below in the shorter term - this I believe deserves explaining.
We choose the benchmarks which we believe are most appropriate to reflect the client's desired outcomes over the medium and longer term. This may mean that when viewed in shorter timeframes, they can diverge. For example in Equity Solutions, we may use an "All-World" benchmark for our global strategies. However, as our offerings in this area tend to be more value-focussed, in the short term we saw underperformance as a result of the dynamics of the recent market moves, which saw a return to benchmark and underperformance from the value and multi-cap factors that we favour in these portfolios.
It is worth noting that we are very careful in explaining our Equity strategies and how they will perform and as our clients understand the role they play in their broader portfolio, they are not surprised or disappointed by short-term performance numbers like these. In our Fiduciary solutions including TIGS, the benchmark is client liability or cash linked as this better matches the outcomes our clients desire. Again, this leads to dislocations in the shorter term as we are allocated to risk assets to some greater or lesser extent. Clients do not therefore expect to have no exposure to negative markets. They do however expect to fall less than the markets themselves and that is what we have delivered.
Product development
A consequence of being client outcome-led is that we aim to develop new investment strategies to address particular needs we have identified. Two such strategies that I have alluded to briefly are either seeded and operational, or in the final stages of development. These are Global Macro (GLOMA), which was seeded with GBP5m of Group capital and Emerging Markets Absolute Return (EMAR), which is in the late stages of development.
GLOMA's performance is shown in the investment performance table and whilst we are currently running EMAR in model portfolio form it has back-tested with almost 20% of annualised performance since 2003. Both of these strategies have many billions of capacity and can therefore add significantly to the Group's profitability.
Whilst I must reiterate that the EMAR results are based upon a model portfolio, the manner in which we have managed the emerging markets portfolio and treated costs is strongly representative of how the strategy would have been managed in a live environment.
We see strong demand for this product emanating from our client base in the markets in which we operate and we will look to seed it before the end of the financial year.
More generally, seeding will become a more important part of our business going forward. Our R&D process is highly active and, beyond these two new strategies, we have a range of strategies emerging that will also require seeding. The features of these macro strategies are that they have very significant capacity and are very scalable to deliver margin expansion faster than some of our existing capabilities. They can therefore be very significant contributors to Group profitability if successful and we consider them to be strategically important to the Group.
Investment opportunities
Another strategic area of focus I highlighted previously was that we would look to acquisitions to grow faster. We continue to believe that there are opportunities in this area, particularly where they add relevant distribution capability to give better access to clients who have need for our solutions or products, generally through expanded presence with client types or geographies.
Whilst we continue to look for the right acquisitions, we have stepped up considerably our investment within the business to grow (which is reflected through the income statement in the form of a margin reduction). These investments currently are the ILC team, the New York and Australian presences, and the new product development and launches, as discussed above.
These are naturally impacting the rate at which we achieve our profit margin objectives at an overall Group level as they only account for limited revenue at present, which we obviously expect to grow over time. They therefore put some downward pressure on our adjusted underlying margin - which would be 29% in their absence, very close to my medium-term strategic target of 30%.
Hot Features
Premium
Six months ended 31 December Reported figures Investment Excluding investments
2018 spend
GBP'000
Net management and advisory
fees 32,588 717 31,871
----------------- ----------- ----------------------
Underlying remuneration 17,598 1,589 16,009
----------------- ----------- ----------------------
Administrative expenses 7,307 354 6,953
----------------- ----------- ----------------------
Other gains 228 - 228
----------------- ----------- ----------------------
Adjusted underlying profit
before tax 7,911 (1,226) 9,137
----------------- ----------- ----------------------
Adjusted underlying margin 24% 29%
----------------- ----------- ----------------------
Hence, in the absence of this investment, we are relatively close to achieving our medium term profit margin targets, in spite of headwinds. Our challenge is clearly to leverage these investments into revenue. Very simplistically, we need to deliver several million of additional revenue to justify these investments and we believe there is significant capacity to achieve this.
More generally, we do see a wide range of opportunities to invest ahead of us, at a time when many others are retrenching. This includes both traditional business acquisitions, but also the hiring of individuals and teams which are generally funded through the remuneration line in the income statement. We expect to make further such investments to increase our growth rate. We will continue to report on these investments and identify progress on our underlying profit margin.
Preparations for Brexit
We have established a Brexit working group led by our in-house legal team and overseen by the Board, who have conducted a thorough analysis of the Group's activities and the potential impact of Brexit.
Based on the geographical location of our client base, the jurisdiction of our funds and the advanced state of agreement on a memorandum of understanding between the FCA and ESMA, we do not believe that our business will be significantly impacted by Brexit however our preparations for the various Brexit outcomes, including a "no deal" departure on 29 March are advanced and ongoing.
Summary
Whilst this has been a difficult period for markets and a more muted one for the Group as a result, our overall AUM/NUM has proved comparatively resilient to negative equity market returns, as we would expect. We are delivering close to 30% margin on our business before investments, and are choosing to invest meaningfully in growth opportunities which we see. This does however have an impact on our margin when considered in total.
We have an active product development pipeline, which we believe can be a significant source of future growth and is therefore strategically important.
I continue to believe we are strongly positioned to keep growing. Opportunities in markets that should emerge in the near and medium term will offer us a chance to continue adding value for our clients and in doing so to significantly increase AUM/NUM.
Mike Faulkner
Chief Executive Officer
8 March 2019
Investment performance as at 31 December 2018
Annualised AUM/NUM Estimated 1 year (%) 3 years 5 years Since inception
investment GBPbn capacity (% p.a.) (% p.a.) (% p.a.)
performance GBPbn
By investment Dec-18 Abs.(1) Rel.(2) Abs.( Rel.(2 Abs. Rel.(2 Abs.( Rel.(2 Date
strategy 1) ) (1) ) 1) )
-------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
STABILITY/RETURN GENERATION
TIGS 9.7 30 (4.7%) (5.0%) 10.0% 2.3% 9.7% 1.1% 9.6% 2.2% 01-Jan-04
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
R&M Stable
Growth Fund (5.0%) (8.8%) 6.2% 2.6% 5.0% 1.5% 7.5% 3.7% 04-Dec-08
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
Inflation Plus
Fund (5.6%) (8.3%) 5.8% 2.7% 5.1% 2.6% 6.4% 3.3% 01-Mar-04
-------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
Fiduciary DC -
Long Term
Growth 0.0 (5.4%) (12.5%) 6.9% (0.3%) 6.3% (0.2%) 8.2% 1.4% 25-Oct-11
-------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
Fiduciary DC -
Stable Growth 0.1 (4.7%) (10.8%) 6.3% 0.1% 5.7% 0.3% 7.3% 1.5% 25-Oct-11
-------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
Fiduciary DC -
Cautious
Growth 0.1 (3.5%) (8.6%) 7.0% 1.8% 7.4% 2.9% 7.8% 3.1% 25-Oct-11
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
Dynamic Asset
Allocation 0.2 10 (5.0%) (5.6%) 5.3% 4.8% 0.0% 0.0% 4.1% 3.6% 02-Sep-14
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
Global Macro 0.0 10 n/a n/a n/a n/a n/a n/a 13.0% 6.1% 01-Mar-18(3)
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
Fiduciary
Insurance 0.1 n/a 0.1% n/a n/a n/a n/a n/a 0.9% n/a 01-Apr-16
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
US Solutions 0.6 n/a (6.5%) (0.3%) 5.2% (0.2%) 3.1% (0.7%) 4.2% (0.6%) 01-Aug-13
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
Total
Solutions AUM 10.8 50
-------- ---------- -----------------------------------------------------------------------------------
RETURN GENERATION/INCOME
UK Equity
Income 0.2 2.0 (9.6%) (0.1%) 6.7% 0.5% 7.7% 3.6% 18.7% 8.6% 03-Feb-09
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
RETURN GENERATION - SPECIALIST
UK Equity
Smaller
Companies 0.5 0.8 (17.2%) (1.4%) 5.1% 0.3% 7.7% 4.2% 11.1% 6.0% 30-Nov-06
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
UK Recovery 0.2 0.2 (11.3%) (1.9%) 10.5% 4.4% 5.4% 1.3% 12.1% 5.2% 17-Jul-08
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
Global
Recovery 0.4 1.0 (13.7%) (10.0%) 11.7% (0.2%) 7.1% (2.8%) 12.7% 3.0% 04-Mar-13
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
Global
Recovery
Focus 0.1 1.0 (24.0%) (14.6%) 6.3% (0.3%) 2.4% (1.9%) 12.6% 5.0% 01-Feb-12
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
RETURN GENERATION - CORE
UK Equity High
Alpha 0.1 1.0 (10.8%) (1.3%) 9.2% 3.1% 5.7% 1.6% 7.5% 2.4% 28-Nov-06
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
UK Core
Segregated 0.2 1.0 (9.9%) (0.4%) 6.5% 0.4% 4.3% 0.2% 7.4% 1.3% 04-Nov-10
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
UK Dynamic
Equity 0.1 1.0 (15.4%) (6.0%) 5.8% (0.3%) 5.3% 1.2% 6.2% 1.5% 22-Mar-07
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
UK Micro Cap
Investment
Company 0.1 0.1 (5.4%) 10.5% 18.9% 14.2% 0.0% 0.0% 20.3% 14.4% 02-Dec-14
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
Global High
Alpha 0.1 7.0 (10.9%) (7.2%) 13.1% 1.2% 0.0% 0.0% 11.1% 1.6% 23-Dec-14
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
Segregated 2.3 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Mandates
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
ILC Emerging Markets
R&M EM Equity
ILC 0.2 n/a (12.4%) 2.2% 9.9% 0.7% 1.9% 0.2% 2.4% 0.6% 10-Jan-12
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
R&M EM
Opportunities
ILC 0.1 n/a (11.1%) 2.1% 7.6% 0.5% 3.6% 2.8% 3.1% 2.8% 05-Jan-13
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
Total Equity
Solutions AUM 4.6 15
-------- ---------- -----------------------------------------------------------------------------------
Structured 3.7 >20 n/a(4) 01-Dec-05
Equity
-------- ---------- -------------------------------------------------------------------- -------------
LDI 15.1 >30 01-Dec-05
-------- ---------- -------- -------- ------ ------- ----- ------- ------ ------- -------------
Total 18.8 >50
Derivatives
NUM
-------- ---------- -----------------------------------------------------------------------------------
Total AUM/NUM 34.1 >100
-------- ---------- -----------------------------------------------------------------------------------
(1) All absolute investment performance is shown before the Group's management and performance fees are deducted. Details of the average management fee margins charged can be found in the AUM/NUM and margins table in the CFO report.
(2) The relative investment performance represents the absolute investment performance less the strategies respective benchmark or target. Relative performance is a measure of the outperformance/underperformance achieved through our investment management process.
(3) Date of Group seeding following short test-trade period.
(4) Derivatives mandates do not target investment outperformance.
Financial review
Key Performance Indicators
1) Growth in fee earning AUM/NUM 6 months Year 6 months
ended ended ended
31 December 30 June 31 December
2018 2018 2017
GBP'bn 34.2 33.8 32.6
Growth in fee earning AUM/NUM 1% 9% 5%
----------------------------------- ------------ -------- ------------
The growth in AUM/NUM is a key indicator of the client engagement process and is the driver for growth in net management fees. This period has seen lower growth as a result of more turbulent equity markets; and the CMA investigation into investment consultancy and fiduciary management which whilst now concluded, has only recently led to more normal levels of new business tendering.
2) Regretted institutional attrition
(RIA) 6 months Year 6 months
ended ended ended
31 December 30 June 31 December
2018 2018 2017
Regretted institutional attrition 1% 8% 3%
--------------------------------------- ------------ --------
The Group's regretted institutional attrition varies from period to period but continues to be low when compared to traditional asset managers. The increase in the prior year was the result of the maturity of a large single (GBP1.4bn) structured equity mandate.
RIA is not directly measured for Equity Solutions - Wholesale as investor redemption decisions tend to be driven by their asset allocation and investment performance outcomes.
3) Growth in net management and
advisory fees 6 months Year 6 months
ended ended ended
31 December 30 June 31 December
2018 2018 2017
GBP'm 32.6 64.2 31.6
Growth in net management and advisory
fees 0% 15% 8%
--------------------------------------- ------------ -------- ------------
Net management and advisory fees represent the underlying revenues generated by the business. This half has seen flat levels compared to H2 2018, mainly as a result of weakness in Equity Solutions - Wholesale, which is discussed in more detail later in this report.
4) Adjusted underlying pre-tax
margin 6 months Year 6 months
ended ended ended
31 December 30 June 31 December
2018 2018 2017
Adjusted underlying pre-tax
margin 24% 25% 27%
--------------------------------- ------------ --------
Adjusted underlying pre-tax margin is an indication of the ability to achieve scale through increased AUM/NUM and revenues, at a lower marginal increase in related expenses. This first half has seen a small decrease in the margin as a result of flat revenue growth combined with extra investment as discussed in the CEO report.
5) Earnings per share (basic)
6 months Year 6 months
ended ended ended
31 December 30 June 31 December
2018 2018 2017
------------ -------- ------------
Adjusted EPS (basic) 10.5p 21.9p 12.0p
Total dividends for the year-to-date 6.3p 18.6p 7.6p
Percentage of adjusted earnings
per share distributed 60% 85% 63%
--------------------------------------- ------------ -------- ------------
The Group's dividend policy is to pay at least 60% of adjusted profits by way of dividend. In addition, the Group expects to generate surplus capital over time, primarily from net performance fee earnings. The Group intends to distribute such available surpluses, after taking into account regulatory capital requirements and potential strategic opportunities, to shareholders.
AUM/NUM and margins
Assets Under Management (AUM) and Notional Under Management
(NUM)
-----------------------------------------------------------------------
Derivative Total
GBP'm Fiduciary Solutions Equity Solutions AUM/
-----------------------------------
Management (NUM) Wholesale Institutional Total NUM
----------- ----------- ---------- -------------- ------- --------
Opening fee
earning 10,642 18,622 1,887 2,692 4,579 33,843
Sales 1,039 452 131 1,194 1,325 2,816
Redemptions (339) (645) (285) (267) (552) (1,536)
----------- ----------- ---------- -------------- ------- --------
700 (193) (154) 927 773 1,280
Net rebalance
and transfers (353) 388 - - - 35
Net flow 347 195 (154) 927 773 1,315
Investment performance (229) - (295) (465) (760) (989)
----------- ----------- ---------- -------------- ------- --------
Closing fee
earning and
mandated AUM/NUM 10,760 18,817 1,438 3,154 4,592 34,169
=========== =========== ========== ============== ======= ========
Opening mandated
AUM/NUM 10,605 18,616 1,887 2,880 4,767 33,988
Increase/(decrease)
in fee earning
AUM/NUM 1.1% 1.0% (23.8)% 17.2% 0.3% 1.0%
Increase/(decrease)
in mandated
AUM/NUM 1.5% 1.1% (23.8)% 9.5% (3.7)% 0.5%
Average fee
earning AUM/NUM 10,799 19,024 1,720 3,091 4,811 34,634
Average margin
December 2018
(bps) 17-18 6-7 70-71 41-42 56-57 16.1
Average margin
June 2018 (bps) 17-18 6-7 70-71 39-40 53-54 16.8
Medium term
margin guidance
(bps) 16-17 6-7 66-68 39-40 Net management fees 2018 GBPm 9.2 6.8 6.0 5.8 11.9 27.9 ------------------------ ----------- ----------- ---------- -------------- ------- --------
As Mike discusses in his CEO report, we had anticipated a period of market downturn and had positioned our clients' portfolios accordingly in preparation for these more difficult market conditions. Our AUM therefore remained resilient on an overall basis. We saw reductions in Equity Solutions Wholesale, however these are not unexpected in current markets as that part of the business is fully exposed to equity markets, and the nature of the clients means outflows are seen at the same time as negative performance. Institutional Equities on the other hand grew strongly, as negative performance was more than offset by very strong net sales in the period.
Revenue
GBP'000 6 months 6 months
ended ended
31 December 31 December Increase/
2018 2017 (decrease)
------------- ------------- ------------
Net management fees
- Fiduciary Management 9,238 9,260 (0)%
- Derivatives 6,790 5,875 16%
- Equity Solutions Wholesale 6,046 7,298 (17)%
- Equity Solutions Institutional 5,834 4,288 36%
------------- ------------- ------------
Net management fees 27,908 26,721 4%
Advisory fees
- Retainers 2,555 2,584 (1)%
- Project fees 2,125 2,292 (7)%
------------- ------------- ------------
Advisory fees 4,680 4,876 (4)%
Total net management and advisory
fees 32,588 31,597 3%
============= ============= ============
Performance fees
- Fiduciary Management 4,526 5,056 (10)%
- Equity Solutions 1,986 2,366 (16)%
------------- ------------- ------------
Total performance fees 6,512 7,422 (12)%
============= ============= ============
Total revenue 39,100 39,019 0%
============= ============= ============
Net management fees
Management fees are generally charged as a percentage of the AUM/NUM we manage clients and are negotiated based on a number of factors including the size of mandate. Net management fees reflect rebates and other payments to external distributors.
Whilst we have seen an increase in net management fees compared to this time last year, this revenue has remained flat compared to the six months ended June 2018. This has been a result of the trajectory of Equity Solutions Wholesale, which is our highest margin revenue area. The Group experienced outflows from this area following the dismissal of a portfolio manager, and whilst these have ceased, negative equity markets have led to negative investment performance (GBP295m) and further outflows (GBP285m). Whilst none of this is unexpected, it has put pressure on revenue growth.
We have also seen flat advisory fees. We expect this trend to continue for the remainder of this financial year and the next, as we will be dedicating advisory resource to supporting the significant number of tenders we expect to respond to following the CMA findings, limiting the amount of additional project work we can complete.
Revenue-weighted asset attribution
The revenues of traditional asset management firms have a high correlation to equity markets. However, the relative diversification of the Group's revenue streams compared to many of our peers mean they display greater stability and resilience to negative equity market movements.
Revenue-weighted asset attribution (RWAA) classifies our net management and advisory revenues by the respective driver of the revenue. Net management fees from Equity Solutions and Fiduciary Management that relate to equity allocations are classified as having an equity market driver, although the allocation to equities within Fiduciary Management is discretionary above a certain minimum (typically 20%). The components of Fiduciary Management that relate to bond and interest rate allocations are classified as having an interest rate driver.
Advisory revenues are not directly correlated to equity markets and therefore are classified as being "independent". In Derivative Solutions, while the underlying revenue is generated on hedging strategies in interest rates, inflation and equities, the revenue is not linked to the mark-to-market valuation but to the contractual notional amount of the derivative instrument. As a result, these revenues are also considered "independent" or cash-like in their characteristics.
RWAA Equities Equities - Interest Cash /
- Discretionary Non-discretionary Rates Independent Other
----------------- ------------------- --------- ------------- ------
31 December 2018 2% 38% 22% 35% 3%
30 June 2018(1) 2% 38% 19% 38% 3%
31 December 2017(1) 4% 43% 19% 31% 3%
(1) Restated to show effect of interest-rate hedging in Fiduciary Management.
We believe this shows that the Group is diversified in its revenue base, with around half of revenue derived from sources which are less directly linked to equity market performance. This is not to say that a prolonged downturn would not have an impact on our business over time, but our revenues should show lower volatility than traditional asset managers.
This characteristic has been proven in this period, where the Group's AUM has shown significant investment resilience compared to many other investment management businesses.
Performance fee revenue
During the six months, we generated GBP4.5m of performance fees from Fiduciary management, all of which was from previously deferred fees.
The table below shows the level of performance fees the Group would crystallise at different outperformance levels. It is based upon the following assumptions:
1) Outperformance is consistent each year;
2) The current performance fee eligible AUM is as at 31 December 2018 without any future sales or redemptions included; and
3) The 31 December 2018 performance level is the starting point.
Outperformance Actual fees Estimated TIGS performance fees
each year GBPm GBPm
-------------- ------------------------------------
December 2018 June 2019 June 2020 June 2021
-------------- ----------- ----------- ----------
-2% - 8 - -
0% 5 9 - -
2% - 9 1 2
Performance fees are crystallised and accounted for on the anniversary dates of each client mandate.
In Equity Solutions, we earned GBP2.0m from the River and Mercantile UK Microcap Investment Company Limited ("RMMIC"). The RMMIC is structured as a closed-ended vehicle. If the net asset value rises above a prescribed value, the independent board of directors of the RMMIC will consider a redemption of shares and a return of capital to investors, which has happened three times over the life of the vehicle. At this point, the Group crystallises a performance fee.
At 31 December 2018, total performance fee eligible assets (excluding RMMIC) were GBP364m. Of these assets, GBP22m were below their benchmark by less than 2%, GBP175m were below their benchmark between 2% to 5% and GBP167m were below their benchmark by more than 5%.
Administrative expenses
GBP'000 6 months 6 months
ended ended
31 December 31 December
2018 2017
------------- -------------
Administrative expenses 7,307 6,973
Less: provision for FCA competition matter - (1,000)
------------- -------------
Underlying administrative expenses 7,307 5,973
============= =============
Total net management and advisory fees 32,588 31,597
Underlying administrative expenses vs net
management and advisory fees 22% 19%
The administrative expense increase compared to the prior period was largely the result of third-party research costs (GBP0.7m) which the Group now bears following the implementation of MiFID II, and fund launch and facilities costs relating to investments as described in the CEO report.
We expect full year administrative expenses to be in the range of GBP15.5-GBP16m.
Remuneration
GBP'000 6 months 6 months
ended ended
31 December 31 December
2018 2017
------------- -------------
Fixed remuneration 12,917 11,446
Variable remuneration 7,936 8,196
------------- -------------
Total remuneration (excluding EPSP costs) 20,853 19,642
Total revenue (excluding other income) 39,100 39,019
------------- -------------
Remuneration ratio
(total remuneration excluding EPSP/total
revenue) 53% 50%
============= =============
Remuneration expense includes: fixed remuneration comprising base salaries, drawings, benefits and associated taxes; and variable remuneration comprising performance bonus, profit share paid to the partners of RAMAM LLP, the amortisation of the fair value of performance share awards under non-dilutive share plans and associated taxes.
The Group is accruing remuneration at a ratio of 54% (year-ended June 2018: 53%) on net management and advisory fees and 50% (June 2018: 50%) on net performance fees.
Executive Performance Share Plan (EPSP)
The EPSP was established at the IPO and vests in June 2019, with the issue of new ordinary shares to Executive Directors. The number of shares expected to be issued is 2.8m, subject to dividend reinvestment prior to June.
Statutory and adjusted profits
The Directors use adjusted profit as a measure of the cash operating profits of the business. Adjusted profit is the basis for the dividend process, with the Group's stated dividend policy being to pay out at least 60% of adjusted profits each year.
Adjusted profit comprises total revenue, remuneration expense, administrative expenses, depreciation, amortisation of software, realised gains or losses on seed investments, and finance income or expense.
Additionally, the Group uses adjusted underlying profit as a measure of the core performance of the Group, as this is adjusted profit excluding performance fees (and remuneration associated with those performance fees).
The adjusted underlying profit margin is a key performance indicator for the Group, as it reflects the ability of the Group to achieve further scale in its business by growing net management and advisory fees faster than costs, as a result of a scalable operating platform. Management have previously stated an objective to grow the adjusted underlying pre-tax margin to above 30% in the medium term.
GBP'm 6 months Year 6 months
ended ended ended
31 December 30 June 31 December
2018 2018 2017
------------ -------- ------------
Statutory profit before tax 9.0 18.4 11.0
Statutory pre-tax margin 23% 25% 28%
Adjusted profit before tax 11.2 21.8 12.2
Adjusted pre-tax margin 29% 29% 31%
Adjusted underlying profit before
tax 7.9 16.1 8.5
Adjusted underlying pre-tax margin 24% 25% 27%
Adjusted profit after tax 8.4 17.6 9.6
Adjusted underlying pre-tax margin represents adjusted underlying profit before tax, divided by net management and advisory fees.
As discussed in the CEO report, excluding the cost and revenue impact of several investments the Group has made, the adjusted underlying pre-tax margin is 29%.
Dividends
On 2 November 2018, the 2018 second interim dividend of 5.5 pence per share was paid, which included a special dividend of 1.3 pence relating to net performance fees. In addition, on 14 December 2018 the 2018 final dividend of 5.5 pence per share was paid, of which 2.3 pence was a special dividend relating to net performance fees.
The Directors have declared a first interim dividend of 6.3 pence per share, of which 2.0 pence per share is a special dividend relating to net performance fees. This represents 60% of the adjusted underlying profit after tax and 60% of the net performance fee profit after tax.
Distributable reserves
A technical matter has come to the Board's attention in relation to the first interim and final dividends in respect of the year-ended June 2018, which were paid in April 2018 and December 2018 respectively. Whilst sufficient distributable reserves existed in the Group at the time of the payments, the Company did not have sufficient distributable reserves itself at the time of the payments to cover the full amounts paid.
We will shortly be circulating a notice of general meeting to allow shareholders to ratify the dividends and rectify the position. All other dividends are unaffected. As at 28 February 2019, the Company had distributable reserves of GBP9.4m.
Kevin Hayes
Chief Financial Officer
8 March 2019
Principal risks and uncertainties
There are a number of potential risks and uncertainties which could have a material impact on the Group's performance over the remaining six months of the financial year and could cause actual results to differ materially from expected and historical results. The Directors do not consider that the principal risks and uncertainties have changed since the publication of the Annual Report for the year ended 30 June 2018. At that date, the most significant risks were identified as being:
-- The loss of, or inability to train or recruit key personnel could have a material adverse effect on the Group's business;
-- The risk of loss resulting from inadequate or failed internal processes, people, systems and controls (including from outsource providers) or from external events;
-- The risk of critical systems or connectivity failures leading to an inability of the Group to operate for a period of time. This could lead to trading losses, as well as client losses and reputational damage;
-- Significant withdrawals of AUM/NUM at short notice and loss of advisory mandates could have an impact on management and advisory fees; and
-- Sustained underperformance across a range of the Group's products and strategies, or poor general performance in markets could result in reduced management and performance fee income.
A more detailed explanation of the risks relevant to the Group is on pages 34-36 of the Group's 2018 Annual Report which is available at www.riverandmercantile.com.
Responsibility statement
The Directors confirm that to the best of their knowledge:
-- The unaudited condensed consolidated set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the EU and gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and
-- The interim management report includes a fair review of the information required by sections 4.2.7R and 4.2.8R of the Disclosure Guidance and Transparency Rules of the UK Financial Conduct Authority.
By order of the Board
Mike Faulkner Kevin Hayes Chief Executive Officer Chief Financial Officer 8 March 2019 8 March 2019
A copy of this interim report will be posted on the Company's website on the date of this statement at www.riverandmercantile.com.
Independent review report to River and Mercantile Group PLC
Introduction
We have been engaged by the company to review the condensed set of financial statements in the interim financial report for the six months ended 31 December 2018 which comprises the condensed consolidated income statement, condensed consolidated statement of comprehensive income, condensed consolidated statement of financial position, condensed consolidated statement of cash flows and condensed consolidated statement of changes in shareholder's equity; and the related notes.
We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
Directors' responsibilities
The interim financial report is the responsibility of and has been approved by the Directors. The Directors are responsible for preparing the interim financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.
As disclosed in note 2, the annual financial statements of the group are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The condensed set of financial statements included in this interim financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.
Our responsibility
Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the interim financial report based on our review.
Our report has been prepared in accordance with the terms of our engagement to assist the company in meeting its responsibilities in respect of interim financial reporting in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity", issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim financial report for the six months ended 31 December 2018 is not prepared, in all material respects, in accordance with International Accounting Standard 34, as adopted by the European Union, and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.
BDO LLP
Chartered Accountants
London
United Kingdom
8 March 2019
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
Condensed consolidated interim financial statements
This Interim Report should be read in conjunction with the Annual Report of the Group for the year ended 30 June 2018.
Condensed consolidated income statement
Unaudited Unaudited
Note 6 months 6 months
ended ended
31 December 31 December
2018 2017
GBP'000 GBP'000
------------- -------------
Revenue:
Net management fees 27,908 26,721
Net advisory fees 4,680 4,876
Performance fees 6,512 7,422
------------- -------------
Total revenue 39,100 39,019
Administrative expenses 4 7,307 6,973
Depreciation 90 74
Amortisation 2,334 2,255
------------- -------------
Total operating expenses 9,731 9,302
Remuneration and benefits
Fixed remuneration and benefits 12,917 11,446
Variable remuneration 7,936 8,196
------------- -------------
Total remuneration and benefits 20,853 19,642
EPSP costs 5 162 816
------------- -------------
Total remuneration and benefits including
EPSP costs 21,015 20,458
Total expenses 30,746 29,760
Other gains and losses 10 297 1,805
Profit before interest and tax 8,651 11,064
Finance income 330 28
Finance expense - (117)
------------- -------------
Profit before tax 8,981 10,975
Tax charge/(credit)
Current tax 7 2,847 2,150
Deferred tax 7 (604) (303)
------------- -------------
Profit after tax for the period attributable
to owners of the parent 6,738 9,128
============= =============
Earnings per share
Basic (pence) 9 8.40 11.34
Diluted (pence) 9 8.08 10.53
Condensed consolidated statement of comprehensive income
Unaudited Unaudited
6 months 6 months
ended ended
31 December 31 December
2018 2017
GBP'000 GBP'000
------------- -------------
Profit for the period 6,738 9,128
Items that may be subsequently reclassified
to profit or loss:
Change in value of investments held
at fair value through other comprehensive
income - 1
Foreign currency translation differences (31) 11
Other comprehensive income (31) 12
Total comprehensive income for the
period
attributable to owners of the parent 6,707 9,140
============= =============
The notes to the condensed consolidated interim financial statements form part of and should be read in conjunction with these financial statements.
Condensed consolidated statement of financial position
Unaudited Audited
31 December 30 June
Note 2018 2018
GBP'000 GBP'000
------------ --------
Assets
Cash and cash equivalents 14,069 24,029
Fee receivables 7,364 7,856
Other receivables 22,322 19,696
Investment management balances 6,094 13,116
Investments held at fair value 6 5,426 -
Available-for-sale investments 6 - 5,165
Deferred tax asset 7 2,161 2,443
Property, plant and equipment 587 601
Intangible assets 32,787 35,025
Total assets 90,810 107,931
------------ --------
Liabilities
Trade and other payables 13,246 21,575
Investment management balances 6,301 13,147
Current tax liabilities 2,796 2,054
Contingent consideration 602 798
Provisions 1,209 1,209
Deferred tax liability 7 2,763 3,153
------------ --------
Total liabilities 26,917 41,936
------------ --------
Net assets 63,893 65,995
============ ========
Equity
Share capital 12 246 246
Share premium 14,688 14,688
Other reserves 11 45,462 49,372
Own shares held by EBT 12 (4,560) (4,981)
Retained earnings 8,057 6,670
Equity attributable to owners
of the parent 63,893 65,995
============ ========
The notes to the condensed consolidated interim financial statements form part of and should be read in conjunction with these financial statements.
The financial statements were approved by the Board and authorised for issue on 8 March 2019.
Mike Faulkner Kevin Hayes Chief Executive Officer Chief Financial Officer
Condensed consolidated statement of cash flows
Unaudited Unaudited
6 months 6 months
ended ended
31 December 31 December
Note 2018 2017
GBP'000 GBP'000
------------- -------------
Cash flow from operating activities
Profit before interest and tax 8,651 11,064
Adjustments for:
Amortisation of intangible assets 2,334 2,255
Depreciation of property, plant and equipment 90 74
Share-based payment expense 5 911 551
Gain on bargain purchase - (1,805)
Other gains and losses (297) -
------------- -------------
Operating cash flow before movement in
working capital 11,689 12,139
------------- -------------
Decrease in operating assets 4,739 48,154
Decrease in operating liabilities (15,173) (53,900)
------------- -------------
Cash generated from operations 1,255 6,393
Tax paid (2,258) (2,517)
------------- -------------
Net cash (used in)/generated from operations (1,003) 3,876
------------- -------------
Cash flow from investing activities
Purchase of intangible assets (96) (281)
Purchase of property, plant and equipment (75) (342)
Interest received 34 -
------------- -------------
Net cash used in investing activities (137) (623)
------------- -------------
Cash flow from financing activities
Dividends paid 8 (8,846) (11,360)
Transactions in own shares held by EBT - (1,008)
------------- -------------
Net cash used in financing activities (8,846) (12,368)
------------- -------------
Net decrease in cash and cash equivalents (9,986) (9,115)
------------- -------------
Cash and cash equivalents at beginning
of period 24,029 30,759
Foreign exchange movement 26 25
------------- -------------
Cash and cash equivalents at end of period 14,069 21,669
============= =============
The notes to the condensed consolidated interim financial statements form part of and should be read in conjunction with these financial statements.
Condensed consolidated statement of changes in shareholders' equity
Own shares
Share Share Other held by Retained
capital premium reserves EBT earnings Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------- --------- ----------- ----------- ----------- ---------
Audited balance as at
30 June 2017 246 14,688 49,340 (4,766) 8,859 68,367
Comprehensive income for
the period:
Profit for the period - - - - 15,142 15,142
Deferred tax credit on
available-for-sale investments - - (3) - - (3)
Other comprehensive income - - 35 - - 35
--------- --------- ----------- ----------- ----------- ---------
Total comprehensive income - - 32 - 15,142 15,174
Transactions with owners:
Dividends - - - - (17,456) (17,456)
Share-based payment expense - - - - 2,364 2,364
Deferred tax on share-based
payment expense - - - - (789) (789)
Disposal of shares in
respect of award vesting - - - 1,450 (1,450) -
Purchase of own shares
by EBT - - - (1,665) - (1,665)
--------- --------- ----------- ----------- ----------- ---------
Total transactions with
owners: - - - (215) (17,331) (17,546)
--------- --------- ----------- ----------- ----------- ---------
Audited balance as at
30 June 2018 246 14,688 49,372 (4,981) 6,670 65,995
--------- --------- ----------- ----------- ----------- ---------
Comprehensive income for
the period:
Profit for the period - - - - 6,738 6,738
Other comprehensive income - - (31) - - (31)
--------- --------- ----------- ----------- ----------- ---------
Total comprehensive income - - (31) - 6,738 6,707
Transactions with owners:
Dividends - - - - (8,846) (8,846)
Share-based payment expense - - - - 911 911
Deferred tax - - - - (503) (503)
Transfers to retained
earnings (3,866) - 3,866 -
Reserves transfer upon
transition to IFRS 9 - - (13) - 13 -
EBT obligation satisfied
by parent company - - - - (371) (371)
Disposal of shares in
respect of award vesting - - - 421 (421) -
--------- --------- ----------- ----------- ----------- ---------
Total transactions with
owners: - - (3,879) 421 (5,351) (8,809)
Unaudited balance as at
31 December 2018 246 14,688 45,462 (4,560) 8,057 63,893
========= ========= =========== =========== =========== =========
The notes to the condensed consolidated interim financial statements form part of and should be read in conjunction with these financial statements.
Notes to the condensed consolidated interim financial statements
1. General information
River and Mercantile Group PLC ("the Company"), is a company incorporated in England and Wales (Co. no. 04035248). The condensed consolidated interim financial statements for the six months ended 31 December 2018 comprise the Company and its subsidiaries (together referred to as "the Group").
2. Accounting policies
Basis of preparation
These condensed consolidated financial statements have been prepared in accordance with IAS 34, "Interim Financial Reporting", as adopted by the European Union. They do not include all disclosures that would otherwise be required in a complete set of financial statements and should be read in conjunction with the Group's 2018 Annual Report. The financial information for the six months ended 31 December 2018 and 31 December 2017 does not constitute statutory accounts within the meaning of Section 434(3) of the Companies Act 2006 and is unaudited.
The annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The Independent Auditors' Report on that Annual Report and financial statements for the year ended 30 June 2018 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.
The same accounting policies, presentation and methods of computation are followed in these condensed consolidated financial statements as were applied in the Group's latest annual audited financial statements with the exception of those that relate to new standards and interpretations effective for the first time for periods beginning on or after 1 July 2018, such as IFRS 9 and IFRS 15.
Going concern
The Directors have a reasonable expectation that the Group and Company have adequate resources to continue in operational existence for the foreseeable future.
In reaching this conclusion, the Board has considered budgeted and projected results of the business including a 2019 budget and three year forecast for the Group with several scenarios, projected cash flow and regulatory capital requirements, and the risks that could impact on the Group's liquidity and solvency over the next 12 months from the date of approval of the financial statements. Additionally, the capital adequacy of the Group in base and stress scenarios is tested as part of the ICAAP and viability statement process.
Accordingly, these condensed financial statements have been prepared on a going concern basis using the historical cost convention, except for the measurement of certain financial instruments that are held at fair value.
Foreign currencies
To the extent that the Group undertakes transactions in currencies other than GBP, these transactions are translated into GBP using the exchange rate prevailing at the date of the transaction. Balances denominated in foreign currencies are translated into GBP using the exchange rate prevailing at the balance sheet date. All foreign exchange differences arising from the settlement of transactions or the translation of balances are recognised in operating expenses in the condensed income statement.
Adoption of new standards and interpretations affecting the reported results or the financial position
In the current period, no standards or interpretations, new or revised, have been adopted that have had a significant impact on the amounts reported in the financial statements.
Transition to IFRS9 and IFRS15
This is the first set of the Group's financial statements where IFRS9 and IFRS15 have been applied. These new standards were adopted from 1 July 2018 and have not had a significant impact on the amounts reported in these financial statements. IFRS9 has impacted the presentation of the financial statements as described in note 14.
Under IFRS 15, revenue is recognised when a customer obtains control of the goods or services. The Group has adopted IFRS 15, initially applying this standard recognised at the date of initial application (1 July 2018). As a result, the comparative information has not been restated and is reported under the previous standards. Whilst IFRS 15 has introduced a different approach for determining whether, when and how much revenue is recognised, the application of these tests to the Group's contracts has not resulted in a change of actual revenue recognised.
The Group recognises revenue under three categories (net management fees, advisory fees and performance fees) which have different features regarding how economic factors affect their amount, timing and uncertainty. These categories are unchanged on adoption of IFRS 15. There are therefore no changes to these interim financial statements as a result of the adoption of IFRS 15, however additional new disclosures required by the standard in annual financial statements will be included in the Group's 2019 Annual Report.
New standards and interpretations
IFRS 16 - Leases
Under IFRS 16 (which will apply to the Group from 1 July 2019), all lease contracts are accounted for more closely with the previous finance lease approach, where lessees recognise a lease liability reflecting future lease payments and a 'right-of-use asset'.
In the income statement, lessees will have to present interest expense on the lease liability and depreciation on the right-of-use asset. In the cash flow statement, cash payments for the principal portion of the lease liability are classified within financing activities. Payments for short-term leases, for leases of low-value assets and variable lease payments not included in the measurement of the lease liability are presented within operating activities.
The Directors have assessed the impact that the adoption of IFRS 16 will have on future periods and have concluded that the IFRS 16 will lead to an increase in non-current assets to reflect lease right-of-use assets and an increase in liabilities to reflect future lease payments.
Significant judgments and estimates
Some of the significant accounting policies require the Directors to make difficult, subjective or complex judgments or estimates. The policies which the Directors consider critical because of the level of complexity, judgment or estimation involved in their application and their impact on the financial statements are:
-- Impairment of intangible assets, goodwill and investments recorded in previous acquisitions. This involves judgments including business growth and estimates including discount rates;
-- Recognition of management and performance fee revenues. This involves estimates of AUM/NUM positions for the purposes of accruing revenue;
-- Provisions, which are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Determining whether provisions are required and at what level, requires both judgment and estimates;
-- The accounting for share-based remuneration. This involves judgments relating to forfeiture rates and business outcomes and estimates of future share prices for national insurance cost; and
-- The accounting for UCITS V deferred remuneration, which involves estimates of forfeiture rates.
3. Seasonality of revenue
The Group earns net management fees evenly throughout the year based on the AUM/NUM during the month or quarter.
The retainer elements of net advisory fees are generally earned evenly throughout the year, however implementation and project fees are earned as specific projects are undertaken.
Performance fees are earned on crystallisation dates, which vary throughout the year but for the Equity Solutions division are generally on a calendar year basis.
4. Administrative expenses
Unaudited Unaudited
6 months 6 months
ended ended
31 December 31 December
2018 2017
GBP'000 GBP'000
------------- -------------
Marketing 459 456
Travel and entertainment 398 345
Office facilities 1,317 1,167
Technology and communications 2,217 2,289
Professional fees 735 566
Research 679 -
Governance expenses 278 237
Fund administration 573 346
Other staff costs 338 140
Insurance 207 167
Irrecoverable VAT 93 175
Provision for FCA competition
matter - 1,000
Other costs 13 85
------------- -------------
Administrative expenses 7,307 6,973
============= =============
5. Share-based payments
Executive Performance Share Plan
Prior to Group's admission to the London Stock Exchange on 26 June 2014, the Board of Directors established the Executive Performance Share Plan (EPSP) to grant the Executive Directors performance share awards. Two classes of performance share awards were made: Performance Condition A awards and Performance Condition B awards.
The compound annual TSR for the performance period (which ended in June 2018) was 18.9%, leading to 57% of the Performance Condition A awards and none of the Performance Condition B awards being eligible for vesting following a one year holding period during which the participant must continue in employment by the Group or, if employment ceases, be classified as a good leaver at the discretion of the Remuneration Committee. The eligible awards will receive dividends on a reinvestment basis during the holding period.
The fair value of the Performance shares was determined by an independent valuation undertaken by EY on behalf of the Remuneration Committee. This fair value was based on a Monte Carlo simulation of possible outcomes based on the returns and volatility characteristics of comparable publicly listed investment management businesses in the FTSE.
The key assumptions used in the valuation were: a mean expected TSR growth rate in line with the risk free rate (1.72%), a TSR volatility derived from the TSR volatilities of listed comparable companies of 30%, and a dividend yield of 4.5%.
The fair value of the Performance Condition A awards is 38 pence per share and the fair value of the Performance Condition B awards is 17 pence per share. The fair value is amortised into EPSP costs over the vesting period and a charge of GBP226,000 was recognised for the six months ended 31 December 2018 (2017: GBP226,000), which is treated as a non-cash adjusting item. The weighted average contractual remaining life of the A and B awards as at 31 December 2018 is six months.
The Directors expect that any shares that vest will be subject to applicable employer's national insurance at the date of vesting. An accrual for this cost has been calculated based on the current rate of national insurance, the number of the shares that the Directors expect to vest and the share price at the reporting date. The reduction in share price since the year-end has resulted in a credit of GBP64,000 for the six months to December 2018 (2017: charge of GBP590,000) and is included in EPSP costs.
Employee share plans
The Group has established Performance Share Plans (PSP) to allow the grant of nil cost options, contingent share awards or forfeitable share awards.
The Directors have granted awards to staff in respect of the years ended 30 June 2016, 30 June 2017, 30 June 2018 and 30 June 2019 which vest on 30 June 2019, 2020, 2021, or 2022 depending on the award.
The fair value of the awards has been estimated using a combination of Monte Carlo simulation and Black-Scholes modelling. The charge recognised in respect of PSP awards in the period ended 31 December 2018 is GBP594,000 (2017: GBP270,000). Additionally, a charge of GBP82,000 (2017: GBP107,000) for national insurance on vesting has been accrued.
Full details of the share awards in respect of 2016, 2017 and 2018 can be found in the 30 June 2018 Annual Report.
The charge for the period also includes GBP91,000 for the Group's save-as-you-earn scheme (2017: GBP55,000).
6. Investments held at fair value
The movement in the carrying value of investments is analysed below:
Investments
Available held at fair
for sale value through
investments profit or
GBP'000 loss
GBP'000
-------------- ---------------
At 1 July 2017 12 -
Additions 10,043 -
Movement in fair value through other comprehensive 472 -
income
Disposals (5,362) -
-------------- ---------------
At 30 June 2018 5,165 -
Reclassified on initial application of
IFRS 9 (5,165) 5,165
Movement in fair value through profit and
loss - 261
-------------- ---------------
At 31 December 2018 - 5,426
============== ===============
The introduction of IFRS 9 has resulted in a change in accounting treatment in respect of investments. Investments held at fair value were all previously held as available-for sale ('AFS') assets. All AFS assets had gains or losses recognised through other comprehensive income until realised. In accordance with IFRS 9 all such assets have been reclassified as fair value through profit or loss ('FVPL'). See note 14 for further disclosures on the reclassification.
The Group has invested GBP5m of seed capital in the River and Mercantile Global Macro Fund (the "Global Macro Fund"). The fair value of the Group's investment in the Global Macro Fund was derived from the fair value of the underlying investments, some of which are not traded in an active market and therefore the investment is classified as Level 2 under IFRS 13 Fair Value Measurement. The Global Macro Fund is an unlisted equity vehicle based in Ireland.
7. Current and deferred tax
The most significant deferred tax item is the deferred tax liability established against the IMA intangible assets arising on the acquisition of RAMAM. In addition, a deferred tax asset has been recognised in respect of the EPSP and PSP share schemes. The amortisation of the IMA intangible assets is not deductible for corporation tax purposes therefore the deferred tax liability is released into the income statement to match the amortisation of the IMA intangibles. At each reporting date the Group estimates the corporation tax deduction that might be available on the vesting of EPSP and PSP shares and the corresponding adjustment to deferred tax asset is recognised in the income statement and equity.
Unaudited Unaudited
6 months 6 months
ended ended
31 December 31 December
2018 2017
GBP'000 GBP'000
------------- -------------
Current tax 2,847 2,150
Deferred tax (604) (303)
Total tax charge 2,243 1,847
============= =============
The tax assessed for the period is higher (December 2017: lower) than the average standard rate of corporation tax in the UK. The differences are explained below:
Unaudited Unaudited
6 months 6 months
ended ended
31 December 31 December
2018 2017
GBP'000 GBP'000
------------- -------------
Profit before tax 8,981 10,975
============= =============
Profit before tax multiplied by the average
rate of corporation
tax in the UK of 19% (31 December 2017: 19%) 1,706 2,085
Effects of:
Expenses not deductible for tax purposes 53 256
Amortisation of RAMAM IMAs (including change
in future tax rates) 407 19
Losses not subject to tax 611 -
Income not subject to tax - (367)
Other timing differences (588) 15
Prior year adjustment 54 (161)
Total tax charge 2,243 1,847
============= =============
The analysis of deferred tax assets and liabilities is as follows:
Unaudited Audited
31 December 30 June
2018 2018
GBP'000 GBP'000
------------ --------
Deferred tax assets
At beginning of period 2,443 3,421
(Charge)/credit to the income statement:
- share based payment expense 219 (189)
Debit to equity:
- share based payment expense (501) (789)
------------ --------
At end of period 2,161 2,443
============ ========
Deferred tax liabilities
At beginning of period 3,153 3,969
Credit to the income statement:
- amortisation of intangibles (390) (851)
Debit to equity:
- movement on fair value of investments - 35
------------ --------
At end of period 2,763 3,153
============ ========
Finance (No.2) Act 2015 enacted reductions on the UK corporation tax rate to 19% with effect from 1 April 2017 and 18% with effect from 1 April 2020. Finance Act 2016 enacted a reduction in the 18% rate to 17% with effect from 1 April 2020. These changes to corporation tax rates impacted the deferred tax charge and closing deferred tax position for 31 December 2018.
8. Dividends
During the period, the following dividends were paid:
Unaudited Unaudited
31 December 31 December
2018 2017
GBP'000 GBP'000
------------- -------------
2017 second interim (8.1 pence per share) - 6,526
2017 final (6.0 pence per share) - 4,834
2018 second interim (5.5 pence per share) 4,422 -
2018 final (5.5 pence per share) 4,424 -
------------- -------------
8,846 11,360
============= =============
The first interim dividend of 6.3 pence per share will be paid on 12 April 2019 to shareholders on the register as at 22 March 2019.
9. Earnings per share
The basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares of the Company in issue during the period. The average number of shares held by the Group's EBT during the period are deducted in this calculation.
As the EPSP performance shares (note 5) vest, they will have a dilutive effect on the equity holders of the Company. The potential dilutive effect of the EPSP performance shares is considered in the calculation of diluted earnings per shares.
Additionally, the Group operates a save-as-you-earn scheme for employees. The potential dilutive effect of this scheme is also considered in the calculation of diluted earnings per share.
Earnings per share Unaudited Unaudited
6 months 6 months
ended ended
31 December 31 December
2018 2017
------------- -------------
Profit attributable to owners of the parent
(GBP'000) 6,738 9,128
Weighted average number of shares in issue
('000) 80,235 80,481
Weighted average number of diluted shares
('000) 83,436 86,698
Earnings per share (pence)
Basic 8.40 11.34
Diluted 8.08 10.53
Reconciliation between weighted average shares in issue
Unaudited Unaudited
6 months 6 months
ended ended
31 December 31 December
2018 2017
'000 '000
------------- -------------
Weighted average number of shares in issue
- basic 80,235 80,481
Dilutive effect of shares granted under save-as-you-earn 478 592
Dilutive effect of shares granted under EPSP 2,723 5,625
------------- -------------
Weighted average number of shares in issue
- diluted 83,436 86,698
============= =============
Adjusted profit
Adjusted profit comprises total revenue, remuneration expense, administrative expenses, depreciation, amortisation of software, realised gains or losses on seed investments, and finance income or expense.
Additionally, the Group uses adjusted underlying profit as a measure of the core performance of the Group, as this is adjusted profit excluding performance fees (and remuneration associated with those performance fees).
6 months 6 months
ended ended
31 December 31 December
2018 2017
GBP'000 GBP'000
------------- -------------
Adjusted underlying profit
Net management and advisory fees 32,588 31,597
Administrative expenses (7,307) (6,973)
Underlying remuneration at 54.0%/50.3% (17,598) (15,931)
Depreciation (90) (74)
Amortisation of software (12) -
Net finance income/(expense) 330 (89)
Adjusted underlying profit before tax 7,911 8,530
Taxes (2,129) (1,890)
------------- -------------
Adjusted underlying profit after tax 5,782 6,640
============= =============
Adjusted underlying pre-tax margin 24% 27%
Performance fee profit
Performance fees 6,512 7,422
Less remuneration at 50% (3,256) (3,711)
------------- -------------
Performance fee profit before tax 3,256 3,711
Taxes (619) (705)
------------- -------------
Performance fee profit after tax 2,637 3,006
============= =============
Adjusted profit before tax 11,167 12,241
Adjusted profit after tax 8,419 9,646
Unaudited Unaudited
6 months 6 months
ended ended
31 December 31 December
2018 2017
GBP'000 GBP'000
------------- -------------
Reconciliation to statutory profit
Profit before tax 8,981 10,975
Adjustments:
Amortisation of intangible assets and IMAs 2,321 2,255
Other gains and losses (297) (1,805)
EPSP costs 162 816
------------- -------------
Adjusted profit before tax 11,167 12,241
============= =============
Adjusted profit after tax 8,419 9,646
Weighted average shares 80,235 80,481
Weighted average diluted shares 83,436 86,698
Adjusted EPS:
Basic (pence) 10.49 11.99
Diluted (pence) 10.09 11.13
10. Other gains and losses
Unaudited Unaudited
6 months 6 months
ended ended
31 December 31 December
2018 2017
GBP'000 GBP'000
------------- -------------
Gain on bargain purchase - 1,805
Fair value of contingent consideration 177 -
Financial assets held at fair
value through profit and loss 113 -
Other gains and losses 7 -
297 1,805
============= =============
11. Other reserves
Unaudited Audited
31 December 30 June
2018 2018
GBP'000 GBP'000
------------- ---------
Available for sale reserve - 13
Foreign exchange reserve 369 400
Capital redemption reserve 84 84
Merger reserve 44,433 44,433
Capital contribution reserve 576 4,442
Other reserves 45,462 49,372
============= =========
12. Share capital
The Company had the following share capital at the reporting dates.
Unaudited Audited
31 December
2018 30 June 2018
Number GBP Number GBP
----------- -------- ----------- --------
Allotted, called up and fully paid:
Ordinary shares of GBP0.003 82,095,346 246,286 82,095,346 246,286
=========== ======== =========== ========
The ordinary shares carry the right to vote and rank pari passu for dividends.
Own shares held by EBT Unaudited Audited
31 December 30 June
2018 2018
Number GBP'000 Number GBP'000
------- -------- ------- --------
At start of period 1,807 4,981 2,033 4,766
Shares purchased - - 144 1,665
Shares sold (153) (421) (594) (1,450)
------- -------- ------- --------
At end of period 1,654 4,560 1,583 4,981
======= ======== ======= ========
The total number of share awards expected to vest is 2.4m. The shares held by the EBT are measured at cost.
13. Related party transactions
Related parties to the Group are:
Punter Southall Group (PSG) Unaudited Unaudited
6 months 6 months
ended ended
31 December 31 December
2018 2017
GBP'000 GBP'000
------------ ------------
Transactions - expense
Administrative recharges from
PSG 70 397
============ ============
Unaudited Audited
31 December 30 June
2018 2018
GBP'000 GBP'000
------------ ------------
Balances - due to related
party
Administrative recharges from
PSG - (11)
============ ============
During the period, the Company replaced a share certificate relating to PSG's ownership of 31,302,321 shares in the Company. PSG provided the Company with an indemnity in respect of the replacement.
Key management personnel remuneration
Key management includes the Executive and Non-Executive Directors, and the Executive Committee members. The remuneration paid or payable to key management for employee services is shown below:
Unaudited Unaudited
6 months 6 months
ended ended
31 December 31 December
2018 2017
GBP'000 GBP'000
------------- -------------
Short-term employee benefits 3,277 3,379
Long-term employee benefits 267 -
Post-employment benefits 51 67
Share-based payments 421 452
------------- -------------
Total 4,016 3,898
============= =============
14. Financial instruments
Financial assets and financial liabilities are recognised in the Group's consolidated statement of financial position when the Group becomes party to the contractual provisions of the instrument. Financial assets are de-recognised when the contractual rights to the cash flows from the financial asset expire or when the contractual rights to those assets are transferred. Financial liabilities are de-recognised when the obligation specified in the contract is discharged, cancelled or expires.
The basis of classification for financial assets under IFRS 9 is different from that under IAS 39. Financial assets are classified into one of three categories: amortised cost, fair value through profit or loss ('FVTPL') or fair value through other comprehensive income ('FVOCI'). Management have applied the 'Business Model' and 'Solely Payments of Principle and Interest' tests as prescribed by IFRS 9 to determine the correct classification.
The table below explains the previous measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of the Group's financial assets as at 31 December 2018.
Financial assets held at fair value as at 31 December 2018 (unaudited)
Financial assets Classification GBP'000 Classification GBP'000
under IAS 39 under IFRS 9
----------------------- --------- --------------- ---------
Cash and cash equivalents Loans and receivables 14,069 Amortised cost 14,069
Investment management
balances Loans and receivables 6,094 Amortised cost 6,094
Fee receivables Loans and receivables 7,364 Amortised cost 7,364
Other receivables Loans and receivables 20,887 Amortised cost 20,887
Total 48,414 48,414
--------- ---------
Fair value assets Available-for-sale 5,426 FVTPL 5,426
Total 5,426 5,426
--------- ---------
Total financial assets 53,840 53,840
========= =========
As permitted under IFRS9, the Group has chosen not to restate comparatives on adoption and therefore, the above changes have been applied at the date of initial application.
The basis of classification for financial liabilities under IFRS 9 remains unchanged from under IAS 39.
Financial assets at fair value through profit or loss
Financial assets are classified as FVTPL on application of the 'Business Model' and 'Solely Payments of Principle and Interest' test as disclosed above.
Financial assets at FVTPL are stated at fair value, with any gains or losses arising on re-measurement recognised in profit or loss.
Trade and other receivables
Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less expected credit loss. Interest income is recognised by applying the effective interest rate, except for short term trade and other receivables when the recognition of interest would be immaterial.
The impairment provision on financial assets measured at amortised cost (such as trade and other receivables) has been calculated in accordance with IFRS 9's expected credit loss model, which differs from the incurred loss model previously required by IAS 39.
For trade and other receivables, the Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables. This has not resulted in any material changes.
Cash and cash equivalent balances
Cash and cash equivalents balances comprise cash in hand, cash at agents, demand deposits, and other short-term highly liquid investments that have maturities of three months or less from inception, are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.
Trade and other payables
Trade and other payables are initially measured at their fair value and are subsequently measured at their amortised cost using the effective interest method. Interest expense is recognised by applying the effective interest rate, except for short term trade and other payables when the recognition of interest would be immaterial.
Categories of financial instruments
Financial instruments held by the Group are categorised under IFRS 9 as follows:
Unaudited Audited
31 December 30 June
2018 2018
Financial assets GBP'000 GBP'000
------------ --------
Cash and cash equivalents 14,069 24,029
Investment management balances 6,094 13,116
Fee receivables 7,364 7,856
Other receivables 20,887 18,404
------------ --------
Total financial assets held at amortised cost 48,414 63,405
------------ --------
Investments held at fair value though profit
and loss 5,426 5,165
------------ --------
Total financial assets held at fair value
through profit and loss 5,426 5,165
------------ --------
Total financial assets 53,840 68,570
============ ========
Other receivables excludes prepayments
Unaudited Audited
31 December 30 June
2018 2018
Financial liabilities GBP'000 GBP'000
------------- ---------
Investment management balances 6,301 13,147
Trade and other payables 13,188 21,538
------------- ---------
Total other liabilities at amortised cost 19,489 34,685
------------- ---------
Contingent consideration 602 798
------------- ---------
Total financial liabilities held at fair value
through profit and loss 602 798
------------- ---------
Total financial liabilities 20,091 35,483
============= =========
Other receivables excludes prepayments and trade and other payables excludes deferred income.
The Directors consider the carrying amounts of the loan and receivables financial assets and financial liabilities carried at amortised cost to be a reasonable approximation to their fair values based upon their nature and the relatively short period of time between the origination of the instruments and their expected realisation.
15. Fair value of financial assets and liabilities
The following provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, and held as FVTPL and revalued on a recurring basis, grouped into levels 1 to 3:
Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. The Group does not hold financial instruments in this category;
Level 2 fair value measurements are those derived from inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). The Group's seeding of funds is held within this category; and
Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). The Group's contingent consideration of the ILC team is held within this category. This contingent consideration is measured at fair value at the reporting date. Based on a discount rate of 12% and an assumed AUM growth of 10% per annum, the fair value of the contingent consideration payable is GBP602,000 (2018: GBP798,000).
As at 1 January 2018 the available-for-sale investments previous held at fair value through other comprehensive have been reclassified as equity investments classified as FVTPL, following the IFRS 9 transition.
Financial assets
Unaudited Audited
31 December 30 June
2018 2018
GBP'000 GBP'000
------------- ---------
Financial asset held at fair value through
other comprehensive income - level 2 - 5,165
Financial asset held at fair value through
profit and loss - level 2 5,426 -
5,426 5,165
============= =========
Financial liabilities
Unaudited Audited
31 December 30 June
2018 2018
GBP'000 GBP'000
------------- ---------
Financial liabilities held at fair value
through profit and loss - level 3 602 798
602 798
============= =========
There have been no transfers of financial instruments between levels during the period.
16. Provisions
FCA competition matter
On 29 November 2017, the FCA issued a statement of objection to four asset managers including the Group's subsidiary RAMAM LLP, alleging a breach of competition law concerning the disclosure and/or acceptance of information about the pricing for shares in relation to one IPO and one placing.
In February 2019, the FCA concluded its investigation imposing a penalty of GBP109,000 - in line with the provision held as at 30 June 2018.
Operational error
An operational error has been identified relating to the treatment of transaction taxes in a single segregated mandate. The Directors recognised a provision of GBP1,100,000 in respect of the matter as at 30 June 2018 with a corresponding insurance recovery asset of GBP1,000,000 which is included in other receivables.
17. Events after the reporting period
The Directors have declared an interim dividend of 6.3 pence per share, of which 2.0 pence is a special dividend and relates to net performance fees.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
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