Aug 11, 2013
Executives
David Nish - Chief Executive Paul Matthews - Chief Executive Officer, UK Keith Skeoch - Executive Director
Analysts
Gordon Aitken - RBC Andy Hughes - Exane BNP Paribas Ashik Musaddi - JPMorgan Andrew Crean - Autonomous Research Blair Stewart - Bank of America Merrill Lynch Oliver Steel - Deutsche Bank Stephen Mitchell - Caledonia Investments
David Nish - Chief Executive
Morning and welcome. And it looks like between Aviva and ourselves we’ve managed to coordinate timing a lot better this morning I had to give everyone a chance to get here.
And may be just to get through the some admin first of all, in case you don’t know who I am, and secondly obviously, Safe Harbor and all mobiles off and all that sort of good thing. Obviously I'm joined on stage now by this afternoon by morning still by Paul and Keith and one of the other tasks I’ve got to do amongst the twin-hatting this morning.
So I am the both CEO and CFO. And so one of the things we’ve decided to which hopefully be a help this morning is we’ve actually sort of consolidated a lot of the slides to bring together both the financial performance and the business performance together which means it is a shorter presentation in terms of quantity of slides and hopefully everything is slightly tighter together for that.
And it does mean that the slides in some places are not quite detailed and I won’t be covering everything in the slides but I’ll do my best to quote the highlight strong here but is more to give how much more joined up sort of message. .So let me, before beginning just some thoughts on the first six months and how do it and particular how do I see it and how we sort of see the business sort of settling.
I think standing back Standard Life has had a very good first six months in 2013, particularly when you look at Paul and Keith’s business there is really some quite stunning growth numbers coming through. And a lot of this is very much driven by the changes in the marketplace and then it was happening the way we expected them to happen the market has no change in the UK as arrived we seem to have been talking about things that we are into enrollment for years but now with the reality and we’re working through them.
And I think very importantly the investments that we’ve made over the last sort of three, four years have been very much well directed, the businesses are delivering and the potential for further growth is incredibly high. And I think particularly when you look upon things like investment propositions coming through from Keith’s side of the host that demonstrating innovation and understanding the customer’s needs and how then the propositions develop and who not bend lanes off because getting them through the distribution channels.
And a lot of folk will talk about to do some broadening at distribution channels tend to be come really truly multi-channel. I'm still very much with that strong underpinned of a focusing cost management and capital management, there still a lot we believe we can do range about in the cost efficiency of this business, there is a lot we can round about driving the ROE of this business.
And we’re hopefully getting to the stages of clarity round about things about regulatory capital. Underpinning and very importantly we continue to invest in our people and very much assigned them for the performance of the last six months there is a lot of really good stuff going on within the organization.
So first of all turning to the financial highlights and operating profit. The Group was up by some 6%, ₤304 million and that was very much driven by strong growth and profitability of both the UK business and Standard Life Investments.
As you’ll have seen assets under administration have increased by 7% to ₤233 billion, and within this Standard Life Investments third-party assets under management have grown to record ₤93.4 billion, a rise of over ₤10 billion in the first six months of this year. I think impressively looking at the growth in assets has been driven Group net flows of ₤6.5 billion in the first six months and we compare that to last year’s obviously well ahead of the first half numbers, but it is also ₤1.5 billion ahead in our full year numbers here from last year.
So there is a lot of momentum across the business. When you look at net flows for third-party business in SLI, these were ₤7.1 billion and are benefiting from the broad product offering, our consistently strong investment performance which I’ll cover later and our continued international expansion.
Long-term savings net flows were up ₤8.9 billion, and that was very much driven by Paul’s business in the UK. When you look at embedded value and embedded value per share grew by nine-tenths and remember this was after paying the fine on the special dividend of 23 pence of the underlying increase in embedded value was on 32 pence during the six months.
Often this increase came from EEV operating profit before tax of some ₤465 million and also included ₤201 million of new business contribution an increase of 13%. And we obviously saw continued good EEV operating cash and cash flow generation of ₤231 million in the six months and I’ll cover that in more detail later.
And finally we’re going to start dividend today are 5.22 pence per share a 6.5% increase from last year’s interim dividend and this is very much a continuation of our progressive dividend policy and reflects the confidence we have in the ongoing growth and development to the business. So when we look at operating profit by business and our business unit operating profit before Group center and financing costs increased by 13% to ₤3 million.
This includes a 28% increase in UK operating profit and 37% increase in the operating profits of Standard Life Investments. The UK business is seeing the benefits of all the work we’ve been doing over the past three years to position up for the market and regulatory changes that we now live with.
At Standard Life Investments’ performance is based upon a increasing global presence and a strong performance across the Board. Canada is on the earliest stage in its journey that’s making solid progress.
There are no material gains for management actions in our first half profits and we continue to pursue additional management actions in Canada in the second half of the year which have made approximately ₤75 million which we talked about back in March. And then finally in our Asian and emerging markets business we can continue to expand to invest at standard of presence in these markets.
So first of all looking at the bridge in operating profit. A change in pension at closing standards reduces the 2012 comparative figure to ₤286 million while this changes impacted on our operating profit that is new in times from the point of view of economics and the business.
Our focus in growing our fee-based revenue continues to deliver results with a 14% or ₤84 million increase in our fee revenue. This was driven by both higher average asset values and the demand for our fee-based propositions.
Expenses across the Group remain tightly controlled. Acquisitions expenses increased by just a ₤11 million or 8% despite a 21% increase in sales.
In maintenance and group centre costs these increased by some ₤44 million and included ₤29 million of additional expenses in the Standard Life Investments reflecting the growth in this business, ongoing product development and the international expansion of our distribution. The remaining additional expenses main relate to investment in Canada and in Asia.
Expressed in basis points, both acquisition and maintenance costs ratios are down from both the half year and the full year 2012 numbers. Spread/risk margin increased by ₤17 million, and this included our interest profit of ₤27 million in our UK and Europe business which benefited from both positive experience and reserve services.
This is partly offset by ₤10 million reduction in Canada during through that changes. The main drivers for our lower capital management result with a higher funding costs following the successful launch of our long-term debt issuance at the end of last year and attractive interest rates was obviously a negative cost of carry, along with the lower returns on Canadian surplus assets following the property sales in 2012 as we derisk that balance sheet.
So in summary, the results are showing strong revenue growth feeding into margin but still investing in growing the business for the future. So if you look at the balance sheet and cash generation we continued with a strong balance sheet with an IGD surplus of ₤3.7 billion, and remember the reduction from 2012 reflects the payment of ₤532 million with the final and special dividend.
Our IGD surplus remains relatively insensitive to market movements. And we continue to have limited shareholder exposure to both yearend – European preferably sovereign debt and minimal exposure to bank debt from those countries.
We continue to benefit from a strong economic capital position and we believe that we are very well positioned for the eventual implementation of Solvency 2. Our capital and cash generation remains strong, our gross operating capital and cash from the core underlying business operations was ₤311 million up from ₤293 million last year.
This was driven by increase gross capital of cash generation from the UK, Canada and SLI. We saw a lower contribution from the more volatile efficiency and back through capital and cash and from the higher financing costs which I expect them of.
We have invested ₤131 million to review business increasing sales by 21%, new business strain as a proportion of sales was unchanged at 1.1%. So now we’ll take our walk through the individual business units.
In the UK, Paul and his team have delivered a lot in the first six months of this year and continue to drive volumes and true operational leverage. UK’s operating profit increased by 29% to ₤161 million a strong result that demonstrates the successful positioning of the UK business of the past few years.
We have seen strong growth in the wholesale retail and corporate propositions and maintains a sustained contribution from the wholesale retail book. We’ve delivered a 7% increase in revenue from UK’s fee-based propositions with higher assets under administration due to possible net inflows of £0.9 I and favorable market business.
Fee based assets in the UK under administration now exceed £90 billion. Changes in business mix resulted in a slightly smaller average revenue business points of 70 we continue to maintain tight control over cost increasing operational leverage opening the jaws of the business.
This period new business sales increased by 31% but acquisition costs were only up by some £2 million. Maintenance expenses rose in absolute terms by £8 million mainly due to higher investment management fees but on per unit basis the ratio to average assets reduced 31 bps to 26 bps reflecting the scalability of the business.
Spread risk margin increase by 39% to £79 million and I will cover that in the next slide. And finally the operating profit from our European businesses were slightly lower due to strain from increase sales in our German business.
Underpinning the UK result is a sustained performance from the older style retail propositions and increased profit from the spread of this business. We continue to see a significant stable contribution from older style fee retail propositions.
Net flows were steady with assets under administration growing to £32.5 billion as well as providing stable revenue these older sale propositions provide a significant source of onward business for our retail new propositions and for annuities. The UK spread/risk margin business contribution was up £21 million to £71 million in the year, in half year with assets under administration of £15 billion.
Around half of the increasing contribution came from an increased return from existing business which included positive experience variances and the remainder from reserve sources. Right, so this is with the first of – the busier slides so I’ll try and sort of guide away bit through this.
First of all staring with contribution, our retail new business continues to demonstrate growth and scalability from breaking even for the first time just two years ago the business contributed £37 million or over 20% of the total UK operating profit. Part of the growth in contribution reflects our success leveraging our corporate business to increase retail direct customer base.
It’s important to note that the contribution here also does not include any contribution or margin captured by Standard Life Investments. Turning now to the transition to a post-RDR world.
Our investment technology and investment solutions has put us in quite a unique position to capitalize in the major changes that are taking place in the UK market including our RDR and to meet the evolving needs of our customers. The strong position of our business in the new model advisor market combined with the support with give to IFAs has assured they meet a very smooth transition to operating under RDR.
Whilst the full impact of RDR will take sometime to filter through with RDR2 next year which may we touch on. We are seeing progress in our retail business as we take advantage of the opportunities provided by this new environment.
So, for example we are no dealing with 342 IFA firms with whom we have not dealt with before or have not dealt with this for a number of years and we think about the contraction within the IFA market the number of IFAs we are now dealing with is up by some 5% to 10%. Net inflows grew by 12% to £1.7 billion driven by increased gross flows of £3.1 billion as we start to deal with this increasing number of advisors.
Despite the ongoing economic uncertainty in the second quarter our second quarter retail net flows were up 31% from the previous year and also 10% up on the first quarter of the year which normally benefits from the increased activity in tax year end. Overall we are growing assets, for example as our advisors look increasingly view on transactional platforms our fully featured Wrap platform continues go from strength-to-strength and assets under administration are up 40% year-on-year to over £14 billion.
Turning now to the corporate business on the UK and again starting with contribution. We generated a 5% increase in contribution to £42 million as assets under administration grew to over £26 billion.
This is an addition to the profit that was generated in our retail new business I was just referring to from customers transferring from the corporate channel. This arises when someone leaves that employer and switches to one of our personal pension products.
Auto enrolment has seen encouraging start we are also encouraged by the low rates of opt-out experienced and a good levels of both pension contributions by employees and employers In addition we have a continuing success in securing new schemes resulting in 135,000 members joining our corporate business in the first six months of this year. This is reflecting growing assets and a significant increase in new business with sales up 41% on 2012.
Net inflows fell in the first half of this year compared to 2012 due to the expected outflows were related to schemes that were lost due to commission payments prior to the implementation of RDR. We’ve seen a slow down in this activity in the second quarter they still expect some of those in the second half of the year.
Nevertheless, our pipeline of business which is expected to transition later in the year and strong. Overall the contribution from both our new retail and corporate propositions is up some 22% in the first half of this year.
Now turning to Standard Life Investments, I think it’s probably fair to say that Standard Life Investments has delivered a great set of results in the first half of this year across all fronts. The strength of Standard Life Investments diverse product offering and expanding global distribution led to third party net flows of £7.1 billion an annualized 17% of opening third party assets under management.
Along with positive market growth has led to £10 billion increase in assets under management to over £92 billion a record. Driven by these strong net flows Standard Life Investments continues to demonstrate strong profit growth increasing operating profit by 37% to £93 million.
This represents over 30% of the overall group profit result which is quite an important shift. Fee based revenue increased 26% to £244 million this reflects with the increased assets under management and a continued shift to higher margin products such as UK mutual funds and the multi-asset investment solutions.
The mix effects of third party fee business revenue bps increased from 40 basis points to 43 basis points during the six months. The increase in cost, that I touched on earlier include investment in growing the business and diversifying our sources of revenue further with geographically and by product category.
EBIT increased to 38%, our Indian asset management associate HDFC Assessment Management of which we own 40% continues to grow and remains the largest mutual fund company in India they recorded a 30% on profits before taxes on £13 million. Now, looking at the mix of Standard Life Investments business is very much of well diversified portfolio by asset class.
Third party assets are spread across equities, fixed income, multi-asset and real estate. We’ve shown strong increases in net flows and multi-asset, fixed interest and MyFolio reflecting attractiveness of our wide product offering in meeting customer demand.
For example the growth rate in MyFolio is far quicker than we experienced in the GARS launch several years ago. In addition commenting briefly on channel although third party assets are waiting more towards institutional business our net inflows in 2013 were split broadly evenly between whole sale and institutional channels.
We have the highest share of wholesale retail net flows in the UK across the industry in both quarter one and quarter two of this year. We have a good pipeline of new investment initiatives which positions us well to continue to meet the changing demand of our clients.
We are also increasingly global in our reach thus the UK continues to be our market by assets under management over 50% of the third party net flows came from outside the UK. This included £1.4 billion of net flows from the U.S.
which accounts from 19% of total net flows. Going forward we continue to work closely with our strategic partners in the U.S., Japan and Indian and are exploring opportunities for growth elsewhere.
The growth in Standard Life Investments has been powered by its investment performance and the development and innovation of our product offering. Our performance track record is excellent with 92% of funds of our benchmark over one year 91% over three years and 82% over five years.
Our multi-asset fund suit has outperformed the cash benchmark overall key time periods since inception and we have some of the best performing mutual funds in the market. To complement this great performance record and to ensure a sustainable long term growth in our business we continue to develop new products and expand our distribution to meet the needs of customers in both new and existing markets.
MyFolio has proven very popular with customers and advisors our multi asset solutions now include the recently launched John Hancock Global Conservative Absolute Return Fund and the slide shows a number of the exiting fund launches for later this year. It is the combination of investment of people, proven investment performance, the global distribution reach and the innovative product offering that makes Standard Life Investments such a fast growing business.
Now, turning to Canada. Operating profit in Canada reduced by some £12 million to £59 million and included no material gains from management actions.
The Canadian team continue to transform the business, Canada though still at a relatively early stage. Growing a fee business is a strategic priority and it’s pleasing to see that during the first half of 2013 our fee revenue is up £12 million or 13%.
We have assets under administration of £17 billion within our fee business a 5% increase in six months due to positive net inflows as well as favorable market returns. We’ve improved net inflows from both corporate pensions and retail segregated funds and the opportunities for future growth are good.
The spread risk margin was £114 million, a reduction of £10 million. This item can be volatile due to reserving changes and the timing extent of management actions.
There was a loss of £9 million from reserving changes this year which compares to an £8 million came in the prior period. As you know reserving changes vary from year to year as actual experience comes through.
However, over the long term we would not expect to see material gains or losses on this line. Acquisition cost were £4 million lower due to cost reductions and in absolute terms, there was a £11 million increase in maintenance cost due to increases in renewal commission, investment management fees, and reflecting higher assets and development spend as we invest into our fee-based business.
However, expressed as a percentage of average assets the ratio improved to 92 bps. And finally, capital management was £7 million lower reflecting the lower returns on surplus assets following the property disposals in 2012.
Now to a slide you know, and love hopefully. Turning now to the scalability of our business, and the benefits of our focus and efficiency.
The graphs continue to demonstrate efficiency improvements. At a Group level, acquisition cost improved to 130 bps compared to 156 bps we reporting the full year 2012 which is been driven by 40 bps reduction in the UK.
Well maintenance cost in absolute terms have risen as you’d expect to support a growing service related business. In unit cost terms they continue to fall.
And we now have recorded continuous unit costs reductions since 2008. This is enabled by our use of technology as well as our focus on productivity and reducing waste.
The overall group ratio fell from 45 bps to 41 bps which include a reduction of 5 bps in the UK. Our focus in increasing assets and further improving and productivity positions us well to deliver further improvements in margin.
So in concluding, on the first half results we continue to grow our dividends and have declared an interim dividend of 5.22 pence per share an increase of 6.5 pence on last year’s interim dividend. We’ve maintained our progressive dividend policy since listing and we remain focused on delivering against that policy.
So, overall, Standard Life has had a really good start to 2013 with Standard performances from our UK business and Standard Life Investments. So, finally, turning to some comments on the business looking ahead.
Looking ahead, growth will continue to be driven through proposition innovation, driven by strong understanding of the end customer need and strengthening our distribution importantly to nationally. Both of these will be underpinned by consistent high performance in investment management and customer service and delivery.
Our performance in the first half continues to demonstrate strong delivery in these areas. As we look towards the second half, the slide shows some of the examples that may give rise to our future growth of where we could add to our future growth.
So, for example we’re well in time to complete the acquisition of Newton Private Clients. As a result, Standard Life Wealth will be a major wealth manager in the UK with over £6 billion of assets.
As we’ve announced, John Hancock announced the launch of a second fund for distribution in the USA. Standard Life Investments from the previous slides has a pipeline of further product launches, and we’re investing to build the capacity of that business.
Standard Life Investments’ new office in Hong Kong opens in two weeks. The opportunity for further strong retail and corporate growth in the UK to strengthening further, our adviser franchise, in Paul’s area, is very much in train.
And finally, more opportunities exist in the UK to develop our direct-to-consumer offerings and we’ve made significant progress with that. So, to wrap-up, we continue to demonstrate that our business model is both resilient and very much aligned to the changing market environment.
More changes to be expected and our business is very well prepared. We have strong product pipelines which are focused on meeting customer needs.
We’re building stronger international distribution led principally by Standard Life Investments and we remain focused on cost control and driving the leverage of our business to increase margin further opening the jaws. Our capital position remains strong and we’re very well pleased for the regulatory changes ahead.
And finally our goal is consistent to deliver ongoing improvement in cash returns and dividends. So, with that, thank you.
Paul, Keith, and I will be glad to take your questions.
Gordon Aitken - RBC
Gordon Aitken from RBC. I have three questions, please.
The wealth management space is an area where you have a small share at the moment, but you've talked about that being a huge market. Can you just update us on the progress, the opportunity, and the competitive advantages you see you have there?
Secondly, as I understand it, on the impaired annuity business you’ve passed this to partnership. With their listing, would you consider any change there?
And I mean while others are talking about maybe writing a bit more, impaired annuities is obviously becoming a bigger market and what's your thoughts on that? And thirdly, on Lifelens, you’ve not talked about it in the presentation there, just can you update, how many new schemes?
I understand you’re still losing business to the commission payers, but what about the new - new business? And how successful has that been?
Thank you.
David Nish
Thanks, Gordon. That sounds great.
I’ll give it Mr. Matthews.
Paul Matthews
So, let’s start with the discretionary fund management business. The DFM market is probably worth around £350 billion in this country.
And we had a small business we’ve started and scratched on Life Wealth. And so growth is somewhat goes up 50% this year.
The Newton deal bring us to around £6 billion. What you were seeing in the IFA marketplace today is IFAs moving out of Investment Management.
One of the reasons why MyFolio's growing so much, one of the reasons GARS been growing so much and one of the reasons why Standard Life Wealth has grown so much, is that IFAs are ceasing to be authorized to give investment advice. And customers are also choosing to go through much more a modern portfolio of assets allocation approach.
The Newton deal should be, all fingers crossed, completed in September, it’s really going very, very well. And we’re actually delighted, I think we’ve been the fastest-growing discretionary fund management business in this country, I think for the last two years.
And with Newton now which is more active management to go with the absolute go with the absolute return management we've got in Standard Life Wealth we’re really, really well positioned. On the Lifelens one's an interesting one in that we now complete suite, as you'll know for an employer, from start to finish, on bringing all together healthcare, risk and pension.
The priority for most of the companies today is to get their auto-enrollment suites there and we’ve already seen this, we’ve announced 50 companies that we’ve auto-enrolled. We've still got another 250 to auto enroll this year well the 3000 auto-enrolled next year and that’s just our own schemes that’s excluding all the new schemes that we’re starting to grow.
So, the priority for most employers at the moment is let's just get from what we have done. So, we get a few companies who wants to do the whole suites for moment on the Lifelens but to be honest, at the moment we're just auto-enrolling people and then we'll be going back to look at the consolidation.
The third was annuity?
Gordon Aitken - RBC
Yeah annuities
Paul Matthews
Impaired annuities, we look at impaired annuities over time what we do at the moment is we partnered with another development provider. So, at the moment if a customer requires, or it's most suitable, to have an impaired annuity then we will refer them to couple of companies that we were with.
We always advice our customers to go out self market option. And we are looking to see whether we do or don’t come in he impaired loss.
So, it’s one of the things I'm productively looking at the moment and we might or might not, we will update you as and when.
David Nish
The thing there is just to add on that but we (indiscernible) auto-enrollment and then made this development. I think one of the things that we should pushed to us in minutes, there is a couple of once it goes with the capacity you would typically deal with this large scale of growth coming.
And we do genuinely believe not only have we got the capacity, that actually that capacity is a big differentiating factor, it would get your competitors, we’ve also launched for the SMB market in terms of how much more online type of position to be able to do that.
Paul Matthews
Yeah, you've obviously seen this morning, another company talk about they were no the slow market. But I think the issue is for us we are in the pension market.
So, at the moment the priority is to look after the large schemes and we look after 50% of the 4100 and I’m affirm it let’s say 350. So, we’ll look after those first make sure they are done and (indiscernible) this year, we have already announced then we’ll start to look after this.
So, when you are the market leader you can do both and actually that‘s, I think that’s one of the benefits that we have actually (indiscernible) is that we’ve the capacity. I think.
.We now most products capacity something like 20 times to be able to cope with enrollment.
Unidentified Analyst
(indiscernible) and I have got three questions please. You mentioned retail direct is growing.
Could you quantify how big that is please? And then it seem like its coming from the corporate customers is there an opportunity to do more sort of direct retail and start advertising proactively in that business that’s the first question.
Second question, what charging model of the wrap customer that are using advisor charging using how does that works such as the legacy thing with that catch up as RDR become more mature?. The third question on the clean share classes, how you are doing with that.
Are you finding you are able to get preferential terms from fund managers or you ending up with a very similar clean share charge as your peers? Thank you.
David Nish
So, retail direct so today about we’ve about 25% of our customer base is now direct and growing. There is two reasons for that.
The first reason is that advisors have now segmented their client base and they only deal with customers that are going to pay them for ongoing advice. So, I’d say that daily we’re, we’re receiving calls from both advisors and from the - from our existing customers to change the agency over to direct.
So, at the moment, I think we’re probably about 1.2 million but that figure is going to grow all the time. The second area which I think you picked up on one is the corporate market.
So, with all of the auto enrolling we’re doing you got to assume that all of those customers typically would not have an advisor and so those customers there are wanting some help. So, general approach is that you auto-enroll a scheme.
The second approach is normally as you are looking after your investment funds and you move the investment funds out to our corporate solutions or GARS. The third stage then is that you’re going to take the DB monies.
And the fourth stage normally is the individual is transforming their assets. So, we’ve a number of customers today, who have been moved into auto enrolling with us and we’re starting to see some of them now saying can they bring their other assets with us.
So, we would expect that to be quite big marketplace for us than normal people do in direct business. Typically there is an advisor for the scheme, which is the employer and there is no advisor to those employees.
Unidentified Analyst
So, I guess, I just start up on that. On the retail business it’s mainly passive at the moment to the extent it’s customers contacting you…
David Nish
Yes.
Unidentified Analyst
Or its advisors.
David Nish
It’s a bit of both. So, it depends on some employers.
So, we had a couple of 40/50 companies. They wanted us to be a bit more proactive with those staff.
So, on the communications we did with auto enrollment we also gave them access to a dedicated website and for some of them in phones based. I’m sure we are going to questions on annuities later on but the other thing we have to save now is a number of companies not only had done their auto enroll with us as they are asking whether we would provide an annuity service to their staff when they come to retirement.
So, there is a couple of things that are going on. I think it’s fair to say that total dynamic is changing.
Historically we’ve had advice or direct and direct has been tiny in many ways unless you want to look at balanced approach. But now with multi-channel people are going to do different things at different times and one of the things we’ve invested we’ve been saying probably for the last three years is that multi-channel is the way (indiscernible).
Well, that’s charging
Unidentified Analyst
On the slideshow that a large proportion of wrap customers using advisor charges. I wondered what the maybe I guess others using?
David Nish
So, the moment it’s just a question about registration, so what we are saying is, we’re already exceeded we actually got acknowledgment from the customer on what agreement they have with the advisor. So, over 80% of those customers now on their back.
We have received the authorities of how it’s going to be worked. I would expect a large percentage of the (indiscernible) but we’ll get those authorizations come through.
They typically come with the advisors does this they are one to one with the client (indiscernible) staying advisor on wrap will do till last now. But I expect (indiscernible) but he will have some but we just deal with us through it let’s have the portfolio and put some plans and then do with us.
Third question.
Unidentified Analyst
Classes, mutual classes.
Paul Matthews
Now this is a really, really interesting area so I’m sure lots of as you have been reading in the marketplace about clean classes and Standard Life have been championing the super clean classes. The differentiation for us is that we have very good deals with a number of investment providers.
And so, so we’ve always been transparent in the wrap. We’ve always rebated the money is on wrap to the client.
And what we will do is with all of our investment companies we work with is we’ll push as hard as we can do for the best deal for the customer. And this is the CP1212 which is coming by April 2014 and will have a big impact for lot of our competitors.
If you gotten this deal, you will look slightly expensive when people do comparisons. And so, you will continue to see us pushing this and you’ll continue to see some investment houses say they don’t really like to negotiate.
But I think we’re very well positioned, we’ve a number of agreements already in place and we would expect to lead on, we expect to be a major player in the platform space. We’re a major player in the platform space than the direct space for the first time for April 2014 you will see us offering net prices to customers, which will be market leading compared with certain other people that people I talked about in the past.
David Nish
I can just to pickup on one of the Paul’s comments there. The whole thing about super clean is in some ways yes there was an economic angle to it.
The most important thing is transparency to end customers actually unless the end customer see the cost of the propositions and how the cost of that proposition is made up so, I do find it unsustainable that this industry will not move in that direction. So, again, I look upon it very much like the commission to beat of five, six years ago.
This is - this is heading in one direction. There will be full transparency all the way through this value chain and we’re driving that because it’s the right thing to do for customers.
Andy?
Andy Hughes - Exane BNP Paribas
Andy Hughes at Exane BNP Paribas. So, I’m going to ask couple of questions on slide 10 I guess, which is talking about the retail fee new which was up sort of 50% year-on-year in terms of the profits.
I think you said that it was up 30% in terms of sales Q1versus Q2 just quite interested in how that‘s playing out these are sustainable trend that we’ve seen against July. But when I think about the earnings for this product line, its sort of about 12% of the Group earnings and its up by 50%.
And then when I look at SLI, that’s obviously almost 20% as the Group’s operating earnings and that sort of quite a lot as well. So, when it came to the dividend decision, did you have a lot of leeway in terms of possibly increasing it more than the standard 6.5% we’ve been using?
Thank you
Paul Matthews
I suppose there was quite a lot in that question Andy that Andy ending up with a specific. I think one of the things that we’re very much trying to sort of demonstrate soon these three or four slides whether its Paul’s business or through into Keith’s business.
There is very much to in a sense really keep things driving through or so significant. One is the multiple is multi-channel should we mean multi-channel as Paul has indicated it’s not about having different engines, different variability in terms of the proposition et cetera.
You actually are driving a different customer experience with driven off a set of core processing capabilities, investment propositions that can effectively service in broader basis. In some ways, how we’re prosecuting multi-channel is very much driven by that sort of view and it gives us capability to leverage going ahead.
The second thing that we certainly believe very strongly in doing that is we’ll be the number one supporter of distributors particularly in the UK the markets were changing. I think that’s why they are important to look at things like these 350 firms, who now shifted across to us because in many ways the commission change has been made and very change we look upon ourselves a supporting our distributors very strongly.
Well at the same time very importantly finding more connections through the customers by connecting customers across the week. When we talk about people in pension schemes moving when they leave, they come across our retail sales force do you then getting involved in other relationships with this exception, this connectivity.
So, that does require the ruling over time and thee is amounts of fear. So, I think you then look at round to ultimately the earnings growth and the capacity of the company then to sort of flow through into dividends.
One of the things we’ve held very close tour heart we’ve used it is to have a progressive dividend policy from day one and we have consistently done that that’s not common in this industry. So we look upon the dividend as a progression.
We don’t look upon the dividend as something that lurches and moves around it’s consistent as a balance between the investment and the business you had to enable it to grow you have seen within Keith’s business. There is increased expenses coming through which is around about both capacity international distribution.
We could easily need different choices but we want to meet that balance coming through. So when we look at it from the interim, the interim we tend to look upon is being the payment on a code during the year.
So in some ways we don’t look upon as being much more than a directional signal around about the confidence we’ve got in that regular progression coming through. We are still at the early days of some of these changes.
There is going to be much more dramatic change to the U.K market. If you hear as Paul says about effectively RDR2 when it comes through there is more change to come.
We are positioning us well for that also enrollments in its early days we are seeing good opportunities to invest organically in our business and we’ll continue to do that. So we think 6.5% represents a reasonable increase at stage in the journey.
Ashik, and then to Andrew?
Ashik Musaddi - JPMorgan
Yeah, thank you. Ashik Musaddi from JPMorgan.
Three questions. First of all can you just talk about your margins on SLW and MyFolio.
I know you have given these margins in the past but how has that changed and what’s the progression in that given that this is becoming a larger part, a growth part as well and growing very fast. Second thing on SLI when should we expect this EBIT margins to come down because given that you’re expanding significantly at this point.
So you are spending a lot in expansion. So when should we expect this cost to at least stabilize on absolute level.
And thirdly can we get some color on the back book of UK what this base you expected to come down. Has that changed or is it like still expected to come down at 2%, 3% base?
Thank you.
David Nish
Why don’t I start with the last question and then ask Paul for the first and then keep away working out how he is going to explain his margin going down tome. I think and in terms of the back book as you see you are very much were into know a consistent pattern coming through.
And I think one of the things that maybe that surprised people is that the asset value is being retained in that back book 32.5 billion. So very much if we do believe its got a longer term too.
Well going through at the moment the redemptions with the convention with profit policies which were one is that did not have a lot of value attached to them. And then we are left with more of the shall I say the longer term pension endowment and longer term life endowment policies which are much more traditional savings vehicles.
And so yeah so the moment we don’t see any significant change to the profile of profitability in that business over the next few years is a very long tail.
Paul Matthews
Margins so if you took it, it depends how much money you are investing. And so if you took a typical SIPP and our typical SIPP charge starts about 60 bps.
And then if you added MyFolio to it you’re typically talking about 95 bps. And if you added Standard Life Wealth to it you’re talking about 125 bps.
So what you can see there are large fund discounts that bring that down but what you will see and where we are different too it’s a majority of the competitors out there is that we have market leading tax wrapped and then market leading model portfolio services whether it’s discretionary or non-discretionary. So and so that’s about the margins but again it depends how much money you put it and you would get this kind of from 60 but the margins on MyFolio and Standard Life Wealth are pretty static.
Keith Skeoch
I’m not aware of any plans to reduce our EBIT margin. I think what you might be suggesting is the pace of increase.
Yeah might well slow, we said at the prelims that our medium term aim is to generate an EBIT margin of about 40% which from all the work we can see suggest that would be and up the quartile performance for a business of our size, scale and mix. And that’s pretty much where we are focused and I’m very much focused on the medium term because if can generate that 40% that’s what allows me to reinvest in the people, technology to generate not just investment performance but also the innovation that lies behind the growth.
On any six month period or year-to-year obviously that margin is going to depend on the revenue yield business mix flow and the level of the level of the market. So it will go through periods when it accelerates a little bit quickly it will fold back but my focus is quite simply on making sure that we can generate the kind of revenue growth we’ve generated over the last five years which is about 15% compound if I can keep costs significantly below that I can continue to drive up the EBIT margin and that’s in effect how we run the business.
David Nish
Andrew?
Andrew Crean - Autonomous Research
Autonomous, three questions. Could you give us the revenue margins with comparatives for the new and old retail and corporate pensions business in the UK.
And do those new business actually make money if you attributing direct costs there. Secondly on Canada well we’ve seen south of 49th Parallel fixed annuity writers beginning to sell.
Would you do you see offers now for your spread business in Canada and is that something which you do to entertain. And then thirdly on SLI with the loss of personal in the absolutely return products.
Could you and I think you’ve been taken off some recommendation panels. Can you give us some sense as to what impact that would have on different parts for your businesses the institutional the retail and what the responses in terms of going to pay the remaining people I mean the is that the major cost headache?
David Nish
Yeah. So just on a couple of the question around the profitability.
Andrew if you go to slide 23 in the support slides you’ll see an analysis of profit contribution. Okay by the different broad business lines.
And now as regards your second bit of that question about allocating the indirect expenses. And I suppose that’s why they are indirect they are not allocating to the individual business lines.
So we allocate as much as we can directly through. So in direct would be so for example Paul so the ability to effectively.
Paul Matthews
Can I have his job?
David Nish
Put Paul’s arms, legs into quite different lines. We don’t do and remember one of the things that we are driving is the scalability and the leverage.
So in anyway we should actually expect just to have that coming through.
Andrew Crean - Autonomous Research
Yeah, David it was actually the revenue margins. I think there is the profit contributions on there.
David Nish
Yeah but I tell you, you can work it backup I think through the other charts because the other charts I think have got revenue numbers in them and between the four I think they do yeah I think they do and if not we can help you afterwards filling the missing bits yeah that will do. Okay and sorry the.
Andrew Crean - Autonomous Research
Canada and SLI?
David Nish
Oh Canada in terms of the annuity business and I’m not really sure we’ve seen much seize in the Canadian context of your businesses, your rationalizing changing hands in some ways what we are doing is putting them as close to run off as we can you obviously need to have some sort of lies association because there will be recurring premiums coming through. But in all of the more traditional lines of business they’re now near enough completely closed GLWB variants were closed really because, not because we didn’t think it was actually a good product sell in the market it was the placing of it customers in the Canadian context were not willing to be the full place of risk.
So you see across the patch that sort of bit of the industry has really sort of gone a wee bit into cold storage. So the focus is much more around about mutual funds and simpler segregated funds with longer term guarantees and that sounds no real activity in the Canadian context of people consolidating books.
Keith Skeoch
Yeah. First of all in terms of what we’ve seen to-date and they have continued to be net inflows into GARS everyday.
Two things I thought important. One we’ve had a reasonably sized institutional mandate that we won transitioning to goals despite the fact that we lost June, and of course I think you should take nature of the launch (indiscernible) correspond which was announced to the public on the 31 of July.
If I look and we’ve had quite detailed conversations with consultants and clients, if I look across the big institutional consultants we remain by on 6 out of the 8, the two that are more negative are well then well I'm being supposed of god’s ably the long haul. We’ve talked to a couple of their clients and they tell us they’re going to stay.
So in the context of a ₤30 billion which continues to perform on track, there is absolutely no evidence of (indiscernible) significant redemptions in the short run nor nay evidence that last coming round the corner and that comes against the background whereas you can imagine of the last two weeks I’ve seen a magnificent team effort talking to consultants and clients all over the world, In terms of people, there is clearly a knock-on at the maintenance I believe that to be relatively marginal. So let me try and put the boarder context in place if you look at alternative numbers voluntary turnovers of Standard Life Investments across the business is about 4.7% that compares with an industry average of 9, if I look at investment professionals the turnover rate in the last year and the last five years has been 3.2%.
so it’s very, very small. As also quite important I think to note that GARS is a big team effort, the insights depend on 400 key professional investment professional across the house, the risk characteristics were put together some time ago and led by actually the late Dr Julian Coutts.
That come into size of fund actually has an awful lot of our operational staff pointing asset as well. The team thing comes through the Standard Life Investments’ DNA.
So, no doubt there is a knock-on cost in terms of individuals do I believe that means that also shifting our compensation ratio there.
David Nish
Okay. Andy?
Andy Hughes - Exane BNP Paribas
It’s Andy Hughes, Exane BNP Paribas, again. I'd just like to come back on Ashik's point about SLI margin on revenue because, as you pointed out, the GARS fund's gone from GBP21 billion to GBP30 billion, and it has a fee of, I guess, about 70 basis points.
But it went over the half year, so the second half revenue for SLI looks particularly strong. So in terms of the investment spend first half versus the second half, is there going to be -- there must be a step up in investment spend in SLI in order to keep below the 40% effectively.
Is that the way to think about it, or are you quite flexible about a 40% target?
Keith Skeoch
A couple of points, to make. First of all, if you look and start comparing apples-with-apples so you look at gross flows as oppose to just net flows.
On the gross flows side GARS was about 57% of gross flows in the first half of the year. We saw inflows into equities of 1.1, we saw inflows into fixed income of 2.7, we saw gross flows into MyFolio of about 0.9.
so the blended rates of the new business we’re taking on is not a direct match for GARS, is not dominated necessarily by GARS. If I look at my pipeline I guess bps is just north of 50 basis points.
So you‘ve seen our revenue yield go from 40 basis points to 43 basis points. So, we do more than GARS, and there are flows there are gross flows there having some asset classes that I think some houses would be very, very proud to have.
Continued capital spend and investments spend is there to support the internationalization of the business and also to help with the operational complexity in the business. So just to give you a flavor, we transitioned 370 funds in the first six months of this year.
We brought some border 158 mutual pension funds and set up internally a 1000 new scurrilities as we broadened and deepened our half. That’s ongoing work as we build out and broaden the capacity of our product lines and we prefer for innovation.
So, I would say it’s not lumpy, and I just actually think it’s reasonably a reasonably smooth progression.
David Nish
Okay. Any other?
Gordon Aitken - RBC Capital Markets
Gordon Aitken from RBC Capital Markets. Just a follow up on GARS then.
So, it was helpful, Keith, to say 57% of the SLI gross flows are into GARS products, but it's clearly having a hugely positive impact for the life and pensions business, so I wonder if you could give a similar proportion, or maybe even a net basis that would great. And what if you took the net flows of GARS out of the life and pensions business, what would the net flows look like?
David Nish
It was in our book.
Paul Matthews
We have amount of business that goes across the market. So, then lot of Keith’s business is a bit lumpy institutional business on GARS well we have the different one that is from us.
So, I would say if you look at out flows we’ve had a very good first half I expect a very good second half, but we’re pushing money into MyFolio which around 40% probably goes into Standard -- MyFolio (inaudible) (00:02:18) probably goes into Standard Life Investments. And Standard Life Wealth to again would use Standard Life Investments compared.
But actually we also have third-part investments houses. So we have a number of other third-party investments houses.
So the company pension scheme we are doing, we got 250 just to auto enroll some of those will choose other investment houses. And some will have a percentage of GARS some might have a percentage to corporate solutions and but there will be others there as well.
So it’s quite difficult to match it I think.
David Nish
We’ve given actually some additional disclosure Gordon at the back that might help. We’ve split down the third-party asset for us between the asset categories a lot more.
You will see multi-asset distinct from MyFolio etcetera. So you’ll see them from the page 111 on what it once that you would be able to see then more of the mix of assets within SLI and will probably bridges across into the categories.
Paul Matthews
I think it’s fair to say the more corporate business we write a lot more people are more comfortable with Standard Life Investments and they certainly get into the SME market plans. These are typically a lot less advised employers.
So the 3000 so she many of those will just be very happy to default to Standard Life corporate pension in the Standard Life Investments is 100%. So I think that something that I think will have a tone of difference next year.
David Nish
We actually are probably more excited then the next option position are being sighted about GARS and some of the GARS etcetera round about what happens with MyFolio?
Keith Skeoch
We always argue that the GARS is a portfolio construction methodology rather than the single content is that innovation coming down the pipe that the I think is in the release of new funds that’s really important. I think it’s also worth stressing that GARS really took often about 2007, 2008 as David and Paul suggested earlier the inflows into Myfolio is that coming through the wholesale channels are actually growing a lot more strongly than GARS and it’s earlier year.
So I think there is greater underlying breadth in these flows then just looking at the raw net sales numbers would suggest.
Paul Matthews
One last example Gordon, would be the Royal Bank of Scotland are just started to get moving. So 100% of all the monies we get from them goes into Myfolio.
Andrew and then John
Andrew Crean - Autonomous Research
Andrew Crean, Autonomous. I was just looking at your expenses half year on half year or the maintenance expenses which were right around I think in the first half last year there £388 million then go up to £443 million in the second half and down to £430 million.
If you look half on half, I mean SLI’s maintenance expense is growing 21% UK is up 8%, Canada is up 10%. I find it quite difficult to really get a sense particularly since you took away the gross investment spend component, as to how to forecast the expenses going forward I mean on a half yearly basis.
Can you help?
Paul Matthews
For each one of the business it tells a different reason. And so if you look at Paul's business, it’s principally driven by the scale of the business, as I said its investment management related costs.
So, in many ways it's not related to people et cetera it’s doing with transactions, if you look Keith’s business it’s probably split one-third, one-third, one-third, one-third of investment not to do with the physical growth in the business that’s there. And third, you even down to things like for example as the business improves, things like remuneration costs will pick up there are more people employed, in SLI.
In Canada, there's three drivers, one is the new commission is on because if you look at the flows between the retail business coming through and there is some more investment management fees because again it’s been shifted towards more mutual fund segregated funds so again no way crossovers into Keith business in terms of charges. And probably again about maybe 40% of the increase in Canada in the half year is to do with IT investing changing technology and the call centers changing their version of benefits in a box, et cetera.
So, there are in a sense volume drivers that’s all being one within. So, in terms of what we are seeing I was trying to give you a sense there are three or four different drivers, it’s not just about a static cost base.
We will see costs go up as they’re related to transactional flows but the underlying head count of the business, if you take that as a measure, it's staying broadly flat, other than probably within Keith's business, which is physically growing.
Andrew Crean - Autonomous Research
So, how you change your photo because you could…
Paul Matthews
That’s why – sorry that’s why I said the bps number is the relationship effectively to the volume that becomes more of the important thing.
Andrew Crean - Autonomous Research
I was wondering I mean these figures have benefited hugely from higher average market levels, this year and last year. If you hadn’t had that, would that have changed your expense management or would you just kept investing in?
Paul Matthews
Well, no because if you look upon what we're trying to do Andrew is that because there is a point at which what you strip out as regards market movements with it? So we look upon as being cash so we’ve got and in many ways because of the way the business is simplifying itself round about fee revenue.
So again with that clear view of cash we’ve got clear view as regards how for example the market is changing for a regulatory framework which again will determine ourselves in modes of transitions we have to do. And then we’ll have a view on to about how we want to invest to grow either to product development et cetera.
So, very much we view it when we set down the budgets and we do – the way we end up doing our plans we do five year views but two year hardcore budgets. So, we’re always taking a view over the life of projects because most projects tend to take an excess of 12 months or development or something.
So, what we are trying to really look at is the cash flow of the business against the growth trajectory. So, we don’t set a – how and – if I fill out there is a whole sweet of just discretionary we feel like doing it.
Everything now is very much geared, you’re round about years where we see the growth in the market coming to change the propositions, one of the propositions we need to build and break it down to that sort of level. So, that’s why we do look upon as much more as the jaws of the margins, Keith was mentioning, if he can just stay in revenue growth rate of that and his costs are going like that, it’s actually how do you move the jaws forward, is really how we end up looking at the planning of the business that’s there.
Operator
John, and then to Blair
Unidentified Analyst
So the FCA I don't seem entirely comfortable with adviser firms using one platform, even if they've got further much in as customers. Do you think there is going to be any follow through on that.
I wonder if you can give some idea of how many of your adviser firms are using as a sole platform provider?
David Nish
Yes, I mean this is the big debate at the moment. And then if Peter Hargreaves was here he'd be saying distributors have their own platform but – so I think the issue the FCA have is if the clients are being forced into propositions through an independent financial advisor through one platform than that therefore restricts them from giving the right deal to the customer.
The majority of advisors will have two or three platforms. We try and track, where we’re - where we’re the primary platforms and sometimes we’re the secondary platform.
But I’ll expect for sometime for advisors still it’s probably, its two or three platforms at the moment. So, I have mutual fund platform or maybe a couple of mutual fund platforms.
But many of them only want to move to one wrap because I think the issue is it’s the proficiency it’s much easier. So, I think the FCA are monitoring just to see how people use those platforms.
What they don’t want to see is move from one platform to another and this might be a better deal for the advisor but a worse deal for the customer and that’s I think what they are more interested in. But I think it’s fair to say we would expect to see two or three platforms for little longer.
In Australia, New Zealand is tended to end up around two platforms. So, I think this was quite similar one.
Paul Matthews
I think it’s really important and we’ve had this since day one we are a whole of market business. We give the whole range of opportunity that’s there its then you compete on the quality of the proposition.
I think it’s where you get really in a sense directed business that the FCA should be worried. Blair?
Blair Stewart - Bank of America Merrill Lynch
Yeah. Thanks.
Thanks very much gentlemen. You guys are working in.
Thanks very much. Just two questions on the, I noticed the acquisition cost ratio came down hugely in the first half of the year just is there an auto enrollment factor that business coming on stream very cheaply from an acquisition cost perspective or is that something that’s more sustainable?
And then secondly, one of your competitors has announced their intention to outsource the Wrap, their platform development spend over the next, over the next few years, over the next, well forever basically I think. I just wonder to get your thoughts on that is this platform development kind of never ending cost trend?
Thank you.
Paul Matthews
So, in terms of our acquisition costs it’s very much is driven by volume in all areas of years of the business. Actually our expenses probably in auto enrollment were slightly up in terms of particularly in a embedded value sense because of some smaller preserving that.
And so it’s much more about the broad base of volume and how your post teams are able to use as I say the multi-channel approach that’s there. But it was only up about £2 million in absolute costs to service that big increase in business that was there.
So, we do seem to have the model nearly in a sub sweet spot round about it so I can’t see material step up in acquisition cost in terms of those direct costs. There might well be a little bit of reserves that might be required about pensions business but all that doing is ring fencing a bit more capital rather than effectively cash going to the business.
David Nish
I actually thought it was quite interesting what Old Mutual did yesterday?
Paul Matthews
I don’t think Old Mutual will - they will never be the first or last actually. I mean I think (indiscernible) new platform or old platform a lot of people on old platforms, a lot of people on old platforms.
And when I say platforms I’m talking about mutual fund platforms and so I think you have got a huge amount of companies out there that have got quite a lot of asset sale and so you know, which ones these are, which predominantly be a very mutual fund supermarket, which is then added a bit of super. And fundamentally if you are listening independent financial advisor you need Wrap platform.
So, we took the decision when we came in to Wrap and start in 2007 and still regard for mutual fund platform, where we could have rented lot more mutual funds we worked for Wrap. So, we had a slow steady progress and you are now staring to see the benefit of that.
I expect to see no just in one firm just announced couple of days ago, I expected to see a quite few more having to say I have just crossed two bigger than investment spend and they need to move to different generations and platform and so I think it’s a strenuously. We have got a modern style Wrap platform which is what we started with.
I think again where differentiation is based on I think on that one.
David Nish
And I think we’ve said a couple of years ago that we saw well consistency in a single digit amount each year that we would keep investing in fund and platforms and technology and its very much geared towards the customer interface so that’s embedded in our numbers and again we just leverage of that if people (indiscernible).
Blair Stewart - Bank of America Merrill Lynch
But presumably you have investigated whether it could be done more efficiently by an outsourcer versus your own direct costs?
David Nish
Remember we did work with FNZ. Our Wrap is eventually have been outsourced since day one to develop, effectively, the connectivity that's there.
So we’ve got that leverage. We’ve always had that.
Paul Matthews
I wouldn’t under estimate the disruption of moving from one platform to another internally. It’s not just cost it’s actually got easy, so it wouldn’t be that easy to do I suspect.
David Nish
In some ways it actually gives rise to that discussion with advisor and the client round about what's happening with your money. Oliver?
Oliver Steel - Deutsche Bank
Oh sorry. Yeah Oliver Steel at Deutsche Bank.
Yes just follow-up on Andrew’s question on costs I mean Jackie you can attest to this of course for this now but Jackie said last year that she thought expenses that actually get down in absolute terms maybe that just replied to the U.K this year and I appreciate that in margin terms it’s much improved but honestly well two things. First on the U.K account can you strip out the increase in the effect with the rising market on your costs to sort of show what’s happening in absolute terms.
And then secondly in SLI you talked about 30 million additional cost for investment I mean that seems to be a huge amount for investments. So I just wondering if you get that more granularity around that increase how long it will last so it’s on a permanent increase in the cost base and when we should expect to pay back on that?
David Nish
Yeah. So in response to Andrew‘s question I said the SLI number was poised but I thought third and third as regards let’s call it transactional related costs because if you look at the scale of the business year-on-year this business is up a lot in terms of what is processing through it.; Keith gave some examples about the new fund structures and everything that are there.
And third is because of that performance of the business so and you would expect your remuneration costs probably a little bit higher remember you are dealing with absolutes here relatives you are still getting the margin going up. And then the third is investment in the business we are opening a new office in Hong Kong.
We are looking at that we’ve expanded what we’ve been doing in Boston and you don’t support the work of a business like Hancock particularly one that’s been so successful with multiple no fund launches without bidding more cost in the ground. And in terms of Jackie’s comment I try to remember that was.
And so and because she wouldn’t knew given this she has not been associated with these results that we maybe operating over a bunch at the moment. Yeah so in terms of and you could have our revenue flow is again you can start the year with budgets but during the year depend how you’re successful you are.
So I think if you look particularly upon things within a bit upon Keith’s business and a bit upon Paul’s business. And we are probably running ahead of where we thought.
That’s why I see back to the joys and if anyone believes our costs in five years time are going to be absolutely lower. I would like to know how you do that particular against the growth we are ending up seeing but relatively we will continue to drive the joys of the business and that’s what we do.
Stephen Mitchell - Caledonia Investments
Stephen Mitchell, Caledonia Investments. Can I just ask a bit more about Canada it was really quite a big part of your business I mean you said fees are up 13% and but what’s the investment that’s required to move that business forward and what are the joys like in Canada together on the right growth track?
David Nish
Well the joys will be quite different in Canada because of the mix in both the business in terms of the proposition has been sold and also the mix between let’s call it older style business that is new style business. So and I do sort of characterize Canada feeling like the U.K three years ago new type of thing.
So if you go back and look at what happened in Paul’s business three, four years ago. We did start like putting some cost into the business because we have to shape those and technology.
I think if you look at the cost within the business I think we said that expenses are up by some £7 million or £8 million of the half year. So we double that but within that I think it’s very close to being like about 40% of that will be new investment money.
So about £6 million or £7million that’s been pertained. And that’s very much to try and help modernize the technology that we are using with internally and in terms of connection with the customer.
And in terms of how the market will shift and the business will still have and you guaranteed segregated fund type products been sold and that’s where the business is within Canada as I see as a market place it’s still not quite as modern as regards to propositions. Over the last month we’ve launched new fund ranges and absolute return proposition has been launched in the retail market space and beginning to generate flows.
So what we are really trying to do is pick up the types of things we had in the UK maybe three, four years ago but is that sort of positioning of the business. Just looking around the room, any last questions, thoughts.
Everyone eager for their lunch. Okay so thank you all for your time I know you probably get busy afternoons with all the companies reporting today.