Setting new standards - Friends Life

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ANNUAL REVIEW CHAIRMAN’S STATEMENT GROUP CHIEF EXECUTIVE’S REVIEW ABOUT THE FRIENDS PROVIDENT GROUP UK LIFE & PENSIONS How we are making our strategies work Performance measures for F&C were reviewed following the 2004 merger of ISIS Asset Management plc and F&C Group (Holdings) Limited Focus on investment performance to exceed client requirements 1 2 Seek and develop distribution opportunities in key markets to deliver organic growth We seek to define and deliver top quartile performance in everything we do. Our strategy is grounded in our belief in a virtuous circle: delivering excellent performance will be validated by organic growth which will, in turn, translate into earnings growth and stock price performance. Our distribution model is based on intermediaries and strategic partnerships. We are focused on the UK and Continental Europe. Our priority is to grow organically. We will take an opportunistic approach towards any further acquisitions. 2006 Key points • ‘Performance First’ initiative launched, defining top quartile performance standards. • Management team strengthened in investment and infrastructure areas. • Selectively upgraded human capital where necessary to support our objectives. • Further reinforced our ‘multi-boutique’ investment model. • Revised incentives to reward superior performance. 2007 Priorities • Investment in front office decision, risk and dealing systems to support the delivery of portfolio performance and new product initiatives. • Ensure stability of core investment teams while selectively continuing to upgrade personnel and optimising resource allocation. • Continue momentum in the Performance First initiative and in communication. • Increase product innovation and speed to market of new products. Investment performance 2006 Key points Performance saw broad improvement during the year with some notable areas of strength: • 64% of actively managed UK retail funds delivered above median performance in their respective IMA sectors and 37% were top quartile. • Fourteen funds achieved Standard & Poor’s Fund Research ratings. • Seven fund managers achieved Citywire ratings during 2006. • 53% of institutional accounts representing 70% of institutional assets under management met or exceeded their investment objectives in 2006 compared to 46% over 3 years. • 71% of investment trusts met or exceeded their performance benchmarks. • Outperformed in UK equities, Continental European equities, Euro and Global Credit, Euro High Yield, Emerging Market Debt, Asia ex-Japan and multi-manager. • Improved performance in US large cap and Emerging Equities, areas of legacy weakness. • Four significant investment awards achieved. 2006 Key points • Third Party Distribution links in the UK established with Canada Life, Zurich International and L&G CoFunds. • New white-label share class on emerging debt fund launched with Commerzbank. • Won first reo® (the Group’s responsible engagement overlay product) mandate in Germany. • Launched SRI fund with Charities Aid Foundation and a Charities Managed Fund in Ireland. • Opened a representative office in Switzerland. 2007 Priorities Our key priority remains organic growth founded on strong investment performance. We will achieve this by: • Retaining UK and Continental Europe focus. • UK retail market: we will work closely with Friends Provident as they develop their wrap business and continue to strengthen our relations with strategic distribution partners and IFAs. • In Europe we will further develop existing sub-advisory and wholesale relationships. • In institutional we will continue to expand client coverage across Europe. Corporate Health The F&C Board has identified sixteen corporate health indicators providing an overview of F&C’s corporate strategy, management, IT infrastructure and control environment. These indicators are assessed by the Board on a quarterly basis and coded as follows: RED = At risk AMBER = Need for improvement GREEN = Competitive Number of green indicators (out of sixteen) 2006 6 2005 1 Number of red indicators (out of sixteen) 2006 2 2005 7 Percentage of Retail funds above median (1 year) 2006 64 2005 54 Percentage of key institutional accounts exceeding client objective (3 years) 2006 46 2005 40 26 Friends Provident Annual Report & Accounts 2006
INTERNATIONAL LIFE & PENSIONS ASSET MANAGEMENT GROUP FINANCIAL PERFORMANCE CONCLUSIONS AND OUTLOOK Key risks Focus on higher margin areas 3 4 We are targeting net new business in higher margin and specialist areas. These include retail, alternatives and specialist institutional mandates yielding performance fees such as emerging market debt, high yield, and high alpha equities. 2006 Key points • • UK retail funds saw net inflows of £309m, a 98% increase on 2005. Launched three new UK equity retail funds which accumulated £230m assets under management. • Launched Luxembourg registered LDI pooled funds on the back of the success in The Netherlands. • Strong inflows in Germany for credit and emerging market debt. • forward rate volatility hedge fund. • In November we launched an FX and Average basis points fees increased over calendar year 2005 and we earned performance fees of £9.5m. 2007 Priorities • Priority products in the UK institutional market will include LDI, reo ® and higher margin products. • In Continental Europe the product focus will vary from market to market. • Priority retail products are UK equities, Stewardship, multi-manager, Life-style Funds, corporate bonds and cashplus products. • We will launch a fixed income hedge fund in Q1 2007 and a fund of hedge funds investment trust in 1H 2007. • We will launch an ethically screened product into the US market. • We will leverage our strength in credit by developing a CDO platform. Average basis points earned on Assets Under Management 2006 22 2005 21 Maintain diversity of earnings whilst leveraging scale We are a diversified business by client type, asset mix and geography. This provides us with a robust business model across market cycles. We benefit from scale in terms of research, infrastructure, distribution and access to the market. 2006 Key points • Continued to diversify distribution across Europe, with our German and French offices generating greater net inflows than 2005. We opened a representative office in Switzerland. • Continued to develop the multiboutique investment model, embedding the concept in our management structure and investment process. • Progressed outstanding IT projects relating to the integration of F&C and ISIS in accordance with the timetable set. 2007 Priorities • Broaden range of higher margin products with new initiatives in GTAA products, hedge funds and private equity fund of funds. • Enhance marketability of SICAV range in Europe. • Develop new products for our subadvisory partners. • Cross sell existing products, such as global real estate securities and ethical funds, into new markets. • Continue to consider opportunities for bolt-on acquisitions, particularly those which bring added distribution. Operating Margin 2006 36.5% 2005 44.1% 1 2 3 4 5 Poor historical investment performance, leading to the loss of key investment mandates. During 2006 we have further strengthened investment teams and will continue to invest in new talent. While investment performance has improved across asset classes, this will take time to translate into the longer term track records, a key requirement of consultants. Market trends towards polarisation (‘barbell’) and fiduciary management. The trend, particularly in The Netherlands, towards fiduciary management presents a business risk for the balanced institutional mandates managed by F&C but also opens up new opportunities. F&C has established a project team to introduce a number of initiatives to manage this risk including our own fiduciary service and Liability Driven Investment and GTAA overlays for balanced and multi-asset portfolios. Impact of EU and other regulatory developments. The Markets in Financial Instruments Directive and Capital Requirement Directive present short to medium term challenges for asset management businesses. Programmes are in place to prepare for implementation. Development of operational platforms. In 2005 F&C terminated its negotiations with Mellon for the outsourcing of the back office operations within the ex-ISIS book of business. In 2006 the administrative operations continued to be run on two distinct platforms, one outsourced and one in-house. Senior management continued to keep the performance of both operational platforms under review by ensuring detailed service level agreements exist and key performance indicators are monitored. Management will, during 2007, be considering ways of enhancing the operational efficiency of these arrangements. Development of front office control processes. Progress has been made during 2006 in relation to the development and implementation of the front office dealing, decision support and pre and post execution monitoring systems. F&C continues to operate short term controls, albeit more manual in nature, to manage the risk. During 2007, significant milestones should be achieved in our strategic plans to replace and enhance these systems. Friends Provident Annual Report & Accounts 2006 27
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Friends Provident plc Pixham End Do
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