Company Announcements

Gross mutual fund sales in 2019 were strong, with inflows of £11.4bn. While we continued to see net outflows overall, these were notably slower than in 2018. We benefited from a return to net inflows of £1.6bn for the Dynamic Bond fund, against net outflows of £4.1bn in 2018. However, we saw outflows totalling £4.3bn from our European Growth strategy where there was a fund manager succession. This also led to the majority of outflows from investment trusts. Segregated mandates benefited from a client transferring £0.5bn from mutual funds into a segregated mandate with us. Significant net outflows were also seen in Merlin Income (£0.4bn), European Special Situations (£0.3bn) and Absolute Return (£0.3bn).

Market and exchange rate movements and our investment outperformance increased our AUM by £4.6bn during the year. At 31 December 2019, our total AUM was £42.8bn, a £0.1bn increase over the year. Of this, our SICAV AUM was £10.6bn at 31 December 2019 (2018: £10.0bn).

Investment performance

At 31 December 2019, 72% (2018: 77%) of our mutual fund AUM delivered above median performance over three years, with 38% achieving first quartile performance, 34% achieving second quartile performance and 17% and 11% in the third and fourth quartiles respectively. Over one year, 55% of our mutual fund AUM delivered above median performance, down from 83% in 2018. These measures are based on weighted averages, so they are significantly affected by the performance of our larger funds.

Segregated mandates and investment trusts make up 12% of our AUM. At the year end, 14% of AUM in segregated mandates and investment trusts were above their benchmarks over three years, impacted by the concentration of the former in value strategies, which have faced challenges in recent years, and by the transition away from the Group in 2019 of a high-performing investment trust. We compare performance to benchmark for these funds as there is no industry-wide data to allow comparison against peers.

In a challenging year for the industry and Jupiter, we delivered profit before tax and exceptional items of £162.7m, 11% below 2018. Statutory profit before tax was £151.0m (2018: £179.2m). The decline in profits was largely due to lower management fees as a result of lower average assets under management and lower performance fees, partially offset by a reduction in administrative expenses before exceptional items. Our average AUM was 7% down on 2018, with the impact of lower market levels in the last quarter of 2018 providing a headwind into 2019. Market appreciation in AUM was largely offset by outflows in equity products in the second half of the year, mainly due to a fund manager change in our European Growth strategy.

As set out in the Chief Executive's review, there have been a number of senior management changes during 2019 and our new Chief Risk Officer joined us on 3 February 2020. This new team is focused on delivering the strategic priorities of the Group and achieving our strategic goals. We have taken action within 2019 to leverage opportunities for operational efficiency, enabling us to reinvest in areas of growth. That has resulted in some restructuring costs which are explained below. We remain committed to a disciplined approach to cost management, whilst ensuring we invest wisely for the future.

For 2019 we have separately presented certain items as exceptional. These principally comprise certain restructuring costs (within operating expenses) relating to changes we have made to redirect resources, leveraging the operational efficiency we achieved, and accounting charges relating to the timing of expense recognition for certain deferred awards, mainly as a result of senior management changes.

RESULTS FOR THE YEAR

Net revenue (see page 8) for the year was £379.1m (2018: £412.7m). Over the year, average AUM was 7% lower than in the prior year,

leading to a corresponding decrease in management fees. Net initial charges of £1.2m (2018: £2.1m, including £0.7m relating to box profits) decreased marginally. Performance fees of £7.9m (2018: £14.9m) were principally earned in a single fund in both 2018 and 2019 and are not expected to recur at these levels.

Net revenue

¹ Includes box profits of £0.7m which were discontinued in early 2018.

The Group's revenue is substantially earned in the form of recurring management fees. Volatility in markets throughout the year presented opportunities for active fund management to add value for investors but, against a backdrop of continuing political and economic uncertainty, especially in the UK and continental Europe, clients were cautious in their approach to investing. Jupiter also faced its own challenges, as referred to in the Chief Executive's review, with the transition of a fund manager resulting in outflows that made up the majority of our reported net outflows for the year. Our positive net flows were into the Fixed Income strategy. In total, market appreciation and investment outperformance were offset by net outflows in 2019.

The Group's net management fee margin for the period was 84 basis points, slightly ahead of 2018. Despite this, there continues to be pricing pressure in the active asset management industry and we are focused on growing our institutional business, which is typically lower margin business. The proposed acquisition of Merian Global Investors brings lower average margin business, due to product mix. As a result of these factors, the management fee margin is expected to be significantly lower in 2020 than in 2019, but on higher average AUM.

Administrative expenses

Operating expenses (before exceptional items) of £146.1m (2018: £152.5m) were 4% lower than in 2018, with reductions in both fixed staff costs and other expenses. The reduction in fixed staff costs reflected the decrease in average headcount from 533 to 529 as we restructured the business in certain areas whilst also adding to our talent in the fund management and distribution teams. Other operating expenses of £86.7m (2018: £91.0m) decreased 5% as a result of cost saving initiatives implemented in 2018 and continued cost discipline in 2019.

The Group's operating margin (before exceptional items) decreased to 43% (2018: 44%), but remained in line with our long-term expectation.

Variable staff costs

¹ Stated before exceptional items (see APMs on page 8).

² Restated for exceptional items.

Variable staff costs before exceptional items increased by 3% to £70.7m (2018: £68.8m). The variable compensation ratio increased by 4% from 26% to 30%.

Cash bonus costs decreased in line with lower profitability to £24.3m (2018: £27.1m). This reflected lower underlying bonus levels per employee, but was offset by buy-out costs arising from a number of senior hires as we made changes to the senior team to address the Group's priorities.

Other variable compensation principally comprises deferred bonuses in the form of share-based and fund-linked awards. The equity-settled nature of previously awarded deferred bonus (as well as LTIP) schemes means that their costs are fixed at the time of grant and subsequently do not change if future earnings rise or fall, although social security costs vary with the Company's share price. Charges relating to deferred bonuses before exceptional items rose by 18%.

The main driver of this movement was the volatility of the Group's share price in 2018 and 2019, which led to an adverse swing of £7.8m in the 2019 compensation charge: in 2018, the share price decreased by more than 50%, effectively lowering the national insurance charge in that year on deferred awards by £5.4m; in 2019, the share price rebounded, adding 39% to its value resulting in the charge increasing by £2.4m. Other factors affecting the charge largely offset each other: a £4.1m reduction in deferred bonus awards in 2019, in line with the decrease in profitability, was matched by a number of smaller charges, notably in respect of higher levels of performance fees shared with fund managers and buy-out costs linked with new hires.

Deferred bonuses in the form of fund-linked awards are now a significant part of our variable compensation model. By linking fund manager remuneration with the returns on the funds they manage, these awards create further alignment between the interests of investors and the individuals with direct responsibility for managing their assets. The awards are revalued to the value of the underlying fund at the balance sheet date. At 31 December 2019, we held £27.1m of investments in our own funds to hedge this obligation.

In previous years, gains and losses from investments held to hedge fund-based awards were reported within 'Other gains/(losses)'. From 2019, we are including such amounts within 'Administrative expenses' (see Note 1.3) as this presentation better reflects the substance of these transactions and provides more relevant information by matching the gains and losses of the hedging instruments with those of the hedged items.

Exceptional items

Exceptional items are items of income or expenditure that are significant in size and which are not expected to repeat over the short to medium term. Such items have been separately presented by virtue of their nature to enable a better understanding of the Group's financial performance. Where appropriate, such items may be recognised over multiple accounting periods. Exceptional items of £11.7m relate principally to accelerated

accounting charges for deferred employee awards (£9.3m; 2018: £3.8m) and redundancy costs (£2.4m; 2018: £nil). Exceptional redundancy items relate to specific restructuring activities in the second half of the year. The acceleration impact was not separately disclosed in 2018 as a result of its size, however comparative data, including relevant APMs have been restated to enable a like-for-like comparison. The effect of the acceleration, which principally relates to the curtailment of the time period over which certain employee services will be provided, is to bring compensation charges that would otherwise have been recognised in future years into the current year.

Other income statement movements

Other gains of £4.1m (2018: losses of £6.5m) principally comprised gains from seed investments, net of hedges, of £3.1m (2018: losses of £5.3m). Seed investments are hedged for beta risk, usually by taking a short position on a fund's benchmark, where it is possible to do so. Gains and losses therefore generally arise from outperformance against a fund's benchmark. In 2019, we recognised gains across a range of seeded funds,

particularly in respect of our Global Sustainable Equities and Global Emerging Market Short Duration Bond funds. As explained above, gains and losses relating to the hedging of fund-based awards are now reported as staff costs.

Profit before tax (PBT)

Statutory PBT for the year decreased by 16% to £151.0m (2018: £179.2m). Underlying PBT decreased by 11% to £162.7m (2018: £183.0m) mainly as a result of lower levels of fee income with reductions in costs achieved through restructuring and cost-saving initiatives.

Tax expense

The effective tax rate for 2019 was 18.7% (2018: 20.2%), marginally below the headline UK corporation tax rate of 19.0% (2018: 19.0%). The difference is due to reductions in current tax arising from timing differences on tax relief, research and development tax credits in relation to prior periods, and tax deductions arising from the exercise of share options.

Our published tax strategy is available from our website at: www.jupiteram.com.

Earnings per share (EPS)

The Group's basic and diluted EPS measures were 27.5p and 26.8p respectively in 2019, compared with 31.8p and 31.1p in 2018.

Underlying EPS

Underlying EPS, defined as underlying profit after tax divided by the number of shares in issue (see page 8), was down 11% at 28.8p (2018: 32.4p¹).

¹ Restated for exceptional items.

Cash flow

The Group generated positive operating cash flows after tax in 2019 of £149.8m (2018: £170.5m), representing 122% (2018: 119%) of statutory profit after tax. Outflows from financing activities included dividend payments of £127.2m to shareholders; in addition, £32.4m of shares were purchased by the Employee Benefit Trust (EBT) to hedge deferred compensation awards to employees in the form of Jupiter shares. The net decrease in cash in the period was £22.3m (2018: £32.5m).

Assets and liabilities

The Group's cash position at the year-end date was £179.4m (31 December 2018: £201.7m), as trading profits were offset by dividend payments to shareholders and payments to the EBT. The adoption of IFRS 16 Leases in 2019 resulted in the initial recognition of assets of £47.3m and liabilities of £60.1m. These were previously not required to be recorded in the balance sheet. It also included a small adjustment to the retained earnings reserve. Further detail can be found in Note 5.1 to the Accounts. The Group has no debt (31 December 2018: £nil). The revolving credit facility (RCF) of £50m, renewed for a further three-year period in July 2019, was not drawn in the year.
 

Seed investments

We deploy seed into funds to ensure an effective launch and/or to accelerate the timescale over which the funds can pass through critical size thresholds. In 2017, we expanded our seed investment programme. Although some legacy positions remain, the majority of the portfolio is invested in new products that have been launched in the past two years which we expect to produce AUM growth in the future. As at 31 December 2019, we had a total investment of £128.7m carried at fair value in Jupiter funds (31 December 2018: £138.4m).

Capital management

Although the Group has continued to be profitable, distributions made to shareholders per our dividend policy and funding of the EBT in the year have resulted in a £12.7m decrease in total shareholders' equity to £611.7m. This is mainly due to the IFRS requirement to only record the year-end ordinary and special dividend in the year in which they are paid.

Capital and regulatory position

The Group assesses its capital position and requirements on a regular basis throughout the year. The capital requirement is formally set annually through the ICAAP and adjusted intra-year if risk exposures change significantly. The Internal Capital Adequacy Assessment Process (ICAAP) document, which is approved by the Board, makes estimations and judgements to establish whether the Group holds an appropriate level of regulatory capital to mitigate the impact of its key risks in the event of these crystallising.

The Group's indicative surplus over regulatory requirements was £189.1m at 31 December 2019 (2018: £213.0m) excluding provision for ordinary dividend. Qualifying capital was £222.8m against a requirement of £75.8m, giving an indicative surplus of £147.0m (2018: £117.7m), after allowing for declared dividends.

We are focused on ensuring that we have an appropriate surplus over the regulatory capital requirement. This is monitored regularly by the Board.

Dividends

Jupiter has a progressive ordinary dividend policy and our intention is for the ordinary dividend pay-out ratio to be 50% of underlying EPS across the cycle. In the event that current year profits are lower than in previous years, the Group maintains the ordinary dividend at the previous high water mark pence per share level. The Board normally makes additional returns of capital to shareholders after retaining sufficient earnings for capital and growth. These additional returns of capital have previously been made through a special dividend.

The Board considers the dividend on a total basis, taking into account our resilient balance sheet and long-term approach to running the business. The Board's intention is to use profits and cash flow to pay ordinary dividends, to retain sufficient capital to maintain a strong balance sheet

and meet regulatory requirements, and to return excess cash to shareholders according to market conditions at the time.

The Board has declared an unchanged full-year ordinary dividend for the year of 9.2p per share. This results in a total ordinary dividend for the year of 17.1p, the same as 2018, representing an ordinary dividend pay-out ratio of 59% of underlying earnings. Following the announcement of the proposed acquisition of Merian Global Investors, no special dividend has been declared for the year ended 2019 as Jupiter balances investment for long-term growth with distribution to Jupiter shareholders. The Jupiter Board's priority continues to be to maintain its capital strength, including a robust surplus over regulatory capital requirements and it remains committed to returning surplus regulatory capital in excess of needs to shareholders, aligned to the Group's capital allocation framework.

The full-year dividend payment will be paid on 9 April 2020 to shareholders on the register on 13 March 2020. The Board does not seek approval for dividend payments at the AGM.

As a result of the absence of a special dividend, the total dividend of 17.1p is down from 28.5p per share in 2018.

Liquidity

The Group's liquidity comprises cash available for use in the business, supported by an undrawn RCF of up to £50.0m. The Group maintains a consistent liquidity management model, with liquidity requirements monitored carefully against the existing and longer-term obligations of the Group.
 

THE USE OF ALTERNATIVE PERFORMANCE MEASURES ("APMs")

The Group uses the following APMs:

A.     To draw out meaningful subtotals of revenues and earnings, together with ratios derived from such measures, commonly used by asset managers after taking into account items such as fee expenses, including commissions payable, without which a proportion of the revenues would not have been earned, and administrative expenses which often have a direct link to revenues through the use of compensation ratios to set remuneration. 

B.     To present users of the accounts with a clear view of what the Group considers to be the results of/distributions from its underlying operations, enabling consistent period-on-period comparisons and making it easier for users of the accounts to identify trends.

C.    To provide additional information not required for disclosure under accounting standards. The information is given to assist users of the accounts in gauging the level of operational gearing and efficiency in the Group.

D.    Used by the Board to determine the Group's ordinary dividend and as a consistent measure of profitability. Also used in the measurement of one of the criteria for share-based awards to senior staff with performance conditions.

All APMs relate to past performance.

Changes in the use of APMs

1.     The presence of non-recurring items in the year has caused the Group to add and amend several existing performance measures to incorporate such items. These measures exclude items arising in the year that are not expected to repeat over the short to medium term and enable users of the accounts to better compare results across years. As a consequence, there are new APMs in respect of 'Exceptional items', 'Operating Expenses before exceptional items', 'Fixed staff costs before exceptional items' and 'Variable staff costs before exceptional items'. In addition, the definitions of 'Variable compensation ratio' and 'Underlying EPS' have been amended and comparatives restated in line with the new definitions. We have included new definitions of 'Underlying profit before tax' and 'Underlying profit after tax' to assist in the definition of 'Underlying EPS'.

2.     In prior periods, the Group has used 'Adjusted cost/income ratio' as a measure of operational efficiency. Senior management considered the alignment of primary performance measures with the Group's strategic approach and has concluded that it would be more appropriate to use 'Operating margin (before exceptional items)' for this purpose. The principal difference between these two measures is the inclusion of the return from seed investments within 'Operating margin (before exceptional items)'. Seed investment is a key part of the Group's strategy to launch products and increase AUM. Net returns from such investments constitute part of the cost/benefit of undertaking such activities to promote interest in the Group's new funds.

3.     Further to 2 above, 'Operating profit (before exceptional items)' has been introduced to aid the definition of 'Operating margin (before exceptional items)'.