Key performance indicators and financial objectives
To measure our progress against our strategy we selected four Key Performance Indicators (KPIs) in 2008: growth in funds under management; growth in revenue; growth in diluted earnings per share; and post-tax return on equity. These KPIs are shown in the Strategy and KPIs overview section, together with two further KPIs, which we have added in 2009, being the excess/shortfall of our fund product performance compared to appropriate benchmarks for private investor products and institutional products. Growing earnings per share and maintaining a high level of post-tax return on equity continue to be the basis for the Group's financial objectives and are also the performance criteria used for the Group's long-term incentive schemes, as the Board believes that long-term shareholder value will be achieved through continued delivery of these objectives.
Earnings per share is a measure that encapsulates the primary drivers of financial performance for the Group. The earnings metric includes management and other fee income which is the measure of revenue that results from growing funds under management and performance fee income from the investment performance of the funds. The management of pre-tax margins as we grow demonstrates our ability to control our expense base. The denominator of average shares outstanding reflects our policy of share repurchases and cancellation. Return on equity is the measure to enable us to assess whether we are utilising shareholders' equity efficiently.
Earnings per share
Adjusted diluted earnings per share on continuing operations for the year decreased 37% to 57.0 cents, compared to 90.2 cents for the prior year. Adjusting items in 2009 include the accelerated amortisation of MGS sales commissions (recorded in the first half), restructuring costs and impairment provisions relating to Ore Hill investments and the residual holding in MF Global. Further details can be found in Note 2 to the financial statements. Statutory diluted earnings per share on continuing operations declined 69% in the year to 28.4 cents.
As part of the Company's distribution policy shares are repurchased and cancelled using excess reserves. During the year 30.5 million shares were repurchased and cancelled at a total cost of $280 million. This was earnings enhancing, resulting in a 0.9% accretion to diluted earnings per share.
Return on equity (ROE)
The Group's post-tax return on shareholders' equity for continuing operations for the year was 13.5% (2008: 41.6%). This excludes the loss arising on the residual interest in brokerage assets in 2009 (and the earnings, and the profit on sale, of MF Global in 2008), and the equity base excludes the residual investment in MF Global (and the proceeds from the sale in 2008). The average equity for the year was $4.4 billion (2008: $4.1 billion). The decrease in ROE is primarily the result of lower average FUM resulting in lower management fee income and lower performance fee income compared to the prior year. The ROE for 2009 is 20% higher than the Group's weighted average cost of capital of 11.2%. The performance criteria for the Performance Share Plan (PSP) awards to executive directors and senior management are based on the Group's average ROE over a three year period, with no award vesting unless the Group maintains an average annual ROE of at least 20% with full vesting only achieved if the average annual ROE reaches 30%. As a result of the lower ROE achieved in 2009, the 2006 PSP awards will vest below 100% and the 2007 and 2008 awards are likely to vest at lower levels than achieved historically.
Funds Under Management (FUM)
FUM is a key driver behind the Group's results and prospects, as it forms the basis from which the Group's revenue is generated. Movements in FUM during the year are shown below:
| Private Investor | Institutional | 2009 Total | 2008 Total | ||||||
| Guaranteed $bn |
Open-ended $bn |
Total $bn |
$bn | $bn | $bn | ||||
| Opening FUM - 1 April 2008 | 31.0 | 12.5 | 43.5 | 31.1 | 74.6 | 61.7 | |||
| Sales | 6.1 | 5.2 | 11.3 | 3.6 | 14.9 | 15.9 | |||
| Redemptions | (4.6) | (4.5) | (9.1) | (7.9) | (17.0) | (10.7) | |||
| Net Sales | 1.5 | 0.7 | 2.2 | (4.3) | (2.1) | 5.2 | |||
| Investment Movement | (1.8) | 0.3 | (1.5) | (5.1) | (6.6) | 5.6 | |||
| FX | (1.7) | (0.3) | (2.0) | (2.2) | (4.2) | 4.0 | |||
| De-risking | (12.1) | - | (12.1) | - | (12.1) | - | |||
| Other | (0.5) | (1.8) | (2.3) | (0.5) | (2.8) | (1.9) | |||
| Closing FUM - 31 March 2009 | 16.4 | 11.4 | 27.8 | 19.0 | 46.8 | 74.6 | |||
Sales and redemptions
A further analysis of sales and redemptions by half year is given below, together with redemption rates:
| Private investor | H2 2009 | H1 2009 | H2 2008 | H1 2008 |
| Sales ($bn): | ||||
| Guaranteed | 2.4 | 3.7 | 1.3 | 3.2 |
| Open-ended | 1.8 | 3.4 | 2.3 | 1.0 |
| 4.2 | 7.1 | 3.6 | 4.2 | |
| Redemptions ($bn): | ||||
| Guaranteed | 2.6 | 2.0 | 1.9 | 1.3 |
| Open-ended | 3.5 | 1.0 | 1.2 | 0.8 |
| 6.1 | 3.0 | 3.1 | 2.1 | |
| Annualised redemptions/average FUM (%): | ||||
| Guaranteed | 24.2 | 13.9 | 12.4 | 9.0 |
| Open-ended | 54.7 | 15.0 | 21.0 | 16.5 |
| Institutional | H2 2009 | H1 2009 | H2 2008 | H1 2008 |
| Sales ($bn) | 0.5 | 3.1 | 4.3 | 3.8 |
| Redemptions ($bn) | 4.9 | 3.0 | 3.2 | 2.3 |
| Annualised redemptions/average FUM (%) | 42.8 | 20.7 | 21.7 | 17.3 |
The increase in private investor open-ended redemptions in the second half of 2009 followed strong sales in the first half and strong performance from AHL, which returned 8% in the financial year. This is a pattern that has often been seen in the past. Although the increase in private investor guaranteed redemptions was higher in the second half of 2009, the redemption rate increased significantly as a result of the decline in guaranteed FUM following the MGS de-risking exercise. Institutional redemptions also increased significantly in the second half of 2009 as investors looked to balance their portfolios and took liquidity where it was available.
Investment movement
The investment performance of our investment managers is described in the Investment Management section.
FX impact
| FUM by currency | 2009 | 2008 | |||
| FUM $bn |
FX gain/(loss) $bn |
FUM $bn |
FX gain/(loss) $bn |
||
| US dollar | 24.1 | - | 46.3 | - | |
| Euro | 14.7 | (2.8) | 20.1 | 3.0 | |
| Australian dollar | 3.6 | (0.9) | 3.9 | 0.4 | |
| Swiss franc | 1.2 | (0.1) | 1.5 | 0.3 | |
| Japanese yen | 2.1 | (0.3) | 1.5 | 0.2 | |
| Other | 1.1 | (0.1) | 1.3 | 0.1 | |
| 46.8 | (4.2) | 74.6 | 4.0 | ||
The table above shows that FUM reduced in the year as a result of the strengthening of the US dollar, in contrast to the previous year. This has also had an impact on our non-US dollar fee income in the year, which has been lower by approximately $23 million in US dollar terms as a result of movements in average exchange rates for 2009 compared to 2008, primarily in relation to the weakening of the Australian dollar. This impact has been offset by favourable exchange rate movements in relation to our operating costs, a significant proportion of which are denominated in sterling and Swiss francs. The weakening of sterling against the US dollar during the year, partly offset by the strengthening of Swiss francs, has reduced our costs in 2009 in US dollar terms by approximately $18 million.
