31 MARCH 2015ALEXANDER FORBES GROUP HOLDINGS LIMITEDINTEGRATED ANNUAL REPORT

OPERATIONAL PERFORMANCE REVIEW

INVESTMENT SOLUTIONS

Performance indicators

 

2014/15

2013/14

2012/13

2014 – 2015
% change

Headcount

159

151

150

5.3

Employee turnover (%)

6

14

11

–7.6

Employee engagement rate (%)

68.1

68.5

67.3

–0.6

Net operating income (Rm)

802

712

634

12.6

Recurring revenue (%)

92

96

94

–4.0

Profit from operations (Rm)

496

438

390

13.3

Number of clients

2 148

2 114

2 020

1.6

AuA (Rbn)

321.5

284.8

237.9

12.9

AuM (Rbn)

264.9

256.0

215.9

3.5

 

Achievements

Challenges

  • Profit from operations up 13%
  • Volatile capital markets
  • Continuing growth in market share
  • High equity market levels increase risk of correction
  • Assets under management and administration grew by 13%
  • Regulatory changes added to costs
  • R9.9 billion in new business
  • Platform offering fell short of expectations
  • Stable employee engagement
  • Active managers in equities struggled to match benchmark returns
  • Pleasing client satisfaction survey feedback
  • Slower traction in IFA retail initiative
  • Well-positioned for emerging regulatory environment
 

PERFORMANCE

Investment Solutions recorded a pleasing result for the year, growing net operating income to R806 million (2013/14: R717 million) – a 12.8% increase on the previous year and slightly above the overall group percentage increase. Profit from operations was R404 million, 12.2% higher than the previous year’s R360 million, again exceeding the growth in group profit from operations.

The business’ performance was especially pleasing given the extremely volatile nature of capital markets and challenges, in particular, in equity performance experienced during the year, plus heightened competition for both the management and administration of institutional funds. Increased compliance requirements placed added pressure on resources and costs.

New business inflows slowed from the R14.5 billion achieved the previous year to R9.9 billion. As was the case in 2013/14, most of the new business opportunities presenting themselves related to clients seeking better performance from their incumbent multi-managers rather than from overall market growth. While our execution on securing prospects disappointed against recent performance, given our excellent retention rates, we continued to gain market share. At year-end Investment Solutions administered or managed about 20% of South African institutional retirement fund assets, up from 19% a year earlier. At 50% of the institutional multi-manager market, we are a player of considerable size with the strongest brand and a reputation that reflects our independently acknowledged track record both in portfolio and administrative performance.

At 31 March 2015, assets under management and administration stood at R322 billion – 13% more than a year ago. This increase was derived from market appreciation (R31 billion), additional net outflows from existing clients (R5 billion) and new business (R9.9 billion). In spite of systemic net outflows, net client cash flow continued to be solidly positive, ending at R5.7 billion. In the third quarter, some R25 billion of assets, managed under a reinsurance contract on behalf of another insurer, were transferred to an administration-only arrangement. The net operating income loss relating to the new arrangement was R23 million.

On a three-year rolling basis, 71% of funds managed performed ahead of benchmark and 70% above the competitor-ranked median, a not altogether satisfactory result, but one which continued to underpin our overall long-term performance on securing the financial well-being of individual members.

RETAIL GROWTH

Retail revenues grew by 13% to R126 million, an achievement that we envisage accelerating following the introduction of a number of new unit trusts in the year. In the institutional multi-manager segment, which in 2014/15 accounted for 62% of net operating income, we restructured various portfolio offerings.

This year, our platform business (which gives intermediaries the ability to structure and manage their own portfolios using our infrastructure) added just R2.5 billion in assets under management, well down on the R7 billion in additional assets recorded in 2013/14. This was chiefly related to intense competition on price in this segment. In the new year, management intends to concentrate considerable attention on re-establishing and marketing the platform segment’s unique value proposition.

This year, we completed our development of an internal capital management model ahead of the anticipated introduction of the Solvency Assessment and Management (SAM) regime. Investment Solutions embraced the regulators’ growing compliance agenda, believing that this will enhance transparency and the equitable treatment of customers. As our systems are aligned to anticipate and exceed the principles underlying this agenda, we do not rank compliance among our major risks. However, meeting such compliance requirements again added significantly to our operating costs.

Our strong emphasis on clear and consistent communication and administrative best practice meant that errors attached to just 0.02% of transactions while our customers are largely satisfied as per independent annual client satisfaction survey this year.

Similarly, this year our employee engagement remained stable at 68%. Employee turnover was largely unchanged at 13%, but was zero for the top 30 critical roles, an achievement that has been repeated for each of the past three years. This is certainly a positive, but in the new year we intend focusing on career progression for those individuals who are ready to enter the skills sets deemed critical.

Our employee headcount was also very similar to the previous year’s 152, a complement which we consider to be near the optimal size for our business.

OUTLOOK

While we succeeded in retaining the great bulk of both our institutional and retail clients, in the new year we intend focusing sharply on marketing and communicating the unique Investment Solutions value proposition – ethical and transparent long-term market-leading multi-manager performance and outstanding administrative capability. In particular, improving our new business win ratio to pre-2014/15 levels will be a key priority.

As a key part of the Alexander Forbes Institutional cluster we anticipate leveraging our capability and brand to grow our retail penetration both in South Africa and in the rest of the sub-continent by aggressively communicating the benefits of the multi-manager model to retail brokers while working to increase our exposure to umbrella fund managers.

The alternative investment segment of our business, particularly our Caveo joint venture, will be emphasised as particular engines of growth. We also intend focusing on international investors, presenting Investment Solutions as the preferred gateway to lucrative African investment opportunities.