De-risking
The reduction of investment exposure across the MGS product range to protect investor capital and the associated product rebalancing, which was primarily undertaken in the third quarter of the financial year, has now been completed. This reduced FUM by $12.1 billion. Certain MGS products retain an ability to increase their investment exposure, and these will do so progressively from 1 April 2009. Further details on the MGS de-risking can be found on here.
Other movements
These include: the net effect in the change of leverage relating to redemptions and prior year sales of $2.0 billion; maturities of $0.7 billion; return of capital of the China Methane Recovery Fund of $0.5 billion; restructuring of an Ore Hill fund of $0.4 billion; partially offset by the acquisition of our share of Ore Hill FUM of $0.8 billion.
Review of Group Income Statement
Revenue for the year was $2,488 million, compared to $3,222 million in 2008, and included gross performance fees income of $627 million, a decrease of 47% compared to 2008. Within performance fees, AHL contributed $609 million and other managers earned $18 million. In terms of recognising performance fees, AHL fees typically are realised on a weekly or monthly basis, Glenwood typically monthly and RMF on an annual basis at 31 December in general. Currently all our investment managers are below performance fee high water marks and therefore it is unlikely that significant performance fee income will be earned in the year ending March 2010.
Gross management and other fees have decreased 8% to $1,861 million, as a result of: the average funds under management for the year declining 6% to $65.1 billion for 2009 from $69.3 billion for the prior year; and to a small fall in gross margins primarily caused by a shift in the proportion of total private investor FUM relating to the higher margined guaranteed products to slightly lower margined open-ended products (see further analysis on margins below).
Net losses on investments amounted to $260 million, which includes seeding and other investment losses of $287 million, net of a gain of $27 million on the sale of exchange shares in the first half. We hold seeding investments for various reasons including: to establish track records on products; to seed new alpha strategies; to seed single managers to test alpha generation; and to co-invest with institutional investors. An analysis of these investment losses is given below. The decrease in these investments from the prior year is the result of management action to reduce the overall level of the portfolio and as a result of losses.
| Seeding investments | Investment at March 2009 $m |
Investment at March 2008 $m |
Gain/(loss) in 2009 $m |
| RMF seeding | 294 | 460 | (78) |
| Ore Hill/Pemba seeding | 53 | 17 | (70) |
| Glenwood seeding | 90 | 37 | (15) |
| MGS seeding | 57 | 221 | (36) |
| AHL seeding | 52 | 78 | 3 |
| Other seeding | 75 | 207 | (32) |
| 621 | 1,020 | (228) | |
| Rebalancing | – | 54 | (25) |
| Secondary market | 46 | 158 | (13) |
| Sales support | 19 | 27 | (8) |
| Other Group investments | 32 | 20 | (13) |
| 718 | 1,279 | (287) |
Sales commissions were $411 million (excluding the accelerated amortisation of MGS sales commissions) compared with $391 million for the prior year. Included in sales commissions is $240 million relating to upfront commissions (also known as placement fees), compared to $216 million in the prior year, and $171 million relating to trail commission (also known as servicing fees), which are down from $175 million in the prior year. Typically, upfront commissions are paid at a rate of 4% on investor money raised and trail commissions are paid at a rate of 0.5% of the product's net asset value, quarterly in arrears.
Excluding the restructuring costs (discussed in the section on Adjusted earnings below), compensation costs have decreased by $176 million to $463 million from $639 million in the comparable period, reflecting the decrease in discretionary employee bonus compensation partly offset by the impact of a higher headcount. Compensation as a percentage of revenue was 20.8% compared to 20.2% last year. We continue to maintain tight controls and significant cost flexibility in our total expense base and in particular compensation expense. Further details on the compensation costs for the year are given in the Remuneration Report.
Other costs amounted to $275 million, up from $238 million in the comparative period, as analysed in Note 4. The significant increase in technology costs during the year related to a number of strategic technology projects to increase the scalability and robustness of our infrastructure and to support growth of our business in the future. Some technology costs were incurred in the year in relation to the integrated hedge fund management business, and further costs relating to this project will be incurred in the 2009/10 financial year. To accomplish this we have grown our temporary headcount, as by using people on short-term contracts we can access the technical expertise we require while maintaining our cost flexibility.
Income from associates largely relates to our investment in BlueCrest, whose contribution to our profit consisted of $87 million of net performance fee income and $50 million of net management and other fee income.
Net finance income for the year was $20 million compared to $34 million last year, excluding interest income from the proceeds from the MF Global IPO ($56 million). Interest expense was $38 million compared to $55 million last year, reflecting the decrease in US dollar interest rates. Interest income on cash and cash equivalents was $58 million, compared with $89 million last year.
Adjusted Earnings
Adjusted earnings relate to the Group's profit excluding those material items which the directors consider should be presented separately on the face of the income statement, in order to aid comparability from period to period. These adjusting items are:
| 2009 $m | |
| Accelerated amortisation of MGS sales commissions | (107) |
| Restructuring costs | (37) |
| Gain on disposal of 50% of subsidiary | 48 |
| Impairment of Ore Hill investments and goodwill | (299) |
| Loss arising from residual interest in brokerage assets | (105) |
| (500) |
The accelerated amortisation charge of $107 million related to unamortised upfront sales commission associated with MGS products and was recorded in the first half. Following the decision to de-risk many of the MGS products to protect investor capital, it was considered unlikely that the capitalised commissions will be fully covered by future fee income and therefore a significant proportion of the capitalised commissions relating to these products has been written down.
The restructuring costs of $37 million comprise the redundancy costs associated with 272 permanent employees. Of the $37 million cost, $17 million relates to cash items and $20 million to non-cash items and of the cash items, $3 million was paid out by the year-end with the remainder being paid in the current financial year. Recognising the decrease in FUM, this cost-saving initiative was designed to reduce the Group's fixed cost base by $60 million on an annual run-rate basis.
