Group Audited Results for year ended 31 March 2018
POLAR CAPITAL HOLDINGS plc
Group Audited Results for the year ended 31 March 2018
Highlights
• Assets under Management ('AUM') at 31 March 2018 £12.0bn (2017: £9.3bn)
• Core operating profit† excluding performance fees £27.8m (2017: £20.9m)
• Profit before share-based payments on preference shares† of £46.4m (2017: £23.6m)
• Pre-tax profit £41.3m (2017: £20.4m)
• Basic earnings per share 36.4p (2017: 17.8p) and adjusted† diluted earnings per share 36.6p (2017: 20.4p)
• Dividends for the year 28.0p per share (2017: 25.0p) including a second interim dividend of 22.0p (2017: 19.5p) per ordinary share to be paid on 27 July 2018 to shareholders on the register on 6 July 2018
• Shareholders' funds £87.7m (2017: £70.7m) including net cash of £87.9m (2017: £58.5m)
• We added the Automation and Artificial Intelligence Fund to our fund range in October 2017. This fund raised over £156m on its launch and has assets of over £242m at the end of May 2018
• Current AUM as at 31 May 2018 £13.4bn
† The non-GAAP alternative performance measures shown here are described in the notes and reconciled to IFRS measures in the Financial Review
Gavin Rochussen, Chief Executive Officer, commented:
"I would like to thank my predecessor, Tim Woolley, who was not only CEO but also a co-founder of the Company. He successfully navigated this niche active fund management boutique through challenging times following the financial crisis and has handed over a sound Company with a strong culture and compelling business model. It is comforting that the majority of our strategies have performed ahead of benchmark in the more volatile markets experienced in the first quarter of 2018. While there remains geopolitical tension and the finalisation of Brexit terms cast a shadow, we are well positioned as fundamental research-driven, active fund managers to find opportunities globally and to continue to deliver above average returns for our clients."
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For further information please contact: |
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Polar Capital +44 (0)20 7227 2700 Gavin Rochussen (CEO) John Mansell (COO)
Canaccord Genuity - Nomad and Joint Broker +44 (0)20 7523 8000 Simon Bridges (QE) Andrew Buchanan Margarita Mitropoulou
Peel Hunt - Joint Broker +44 (0)20 7418 8893 Guy Wiehahn
Camarco +44 (0) 20 3757 4984 Ed Gascoigne-Pees Monique Perks |
Assets Under Management (AUM)
AUM split by Type
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31 March 2018 |
|
31 March 2017 |
|
||||
|
|
£bn |
% |
|
|
£bn |
% |
|
|
Long only |
10.83 |
90.3% |
|
Long only |
8.44 |
91.1% |
|
|
Alternative |
1.17 |
9.7% |
|
Alternative |
0.83 |
8.9% |
|
|
|
12.00 |
|
|
|
9.27 |
|
|
AUM split by Strategy
(in chronological order)
|
|
31 March 2018 |
|
|
31 March 2017 |
|
||
|
|
£bn |
% |
|
|
£bn |
% |
|
|
Technology |
3.30 |
27.5% |
|
Technology |
2.19 |
23.6% |
|
|
Japan |
1.07 |
8.9% |
|
Japan |
0.97 |
10.4% |
|
|
European Long/Short |
0.18 |
1.5% |
|
European Long/Short |
0.27 |
3.0% |
|
|
Healthcare |
1.63 |
13.6% |
|
Healthcare |
1.43 |
15.4% |
|
|
Financials |
1.81 |
15.1% |
|
Financials |
1.32 |
14.2% |
|
|
Emerging Markets |
0.16 |
1.3% |
|
Emerging Markets |
0.39 |
4.2% |
|
|
Convertibles |
0.45 |
3.8% |
|
Convertibles |
0.43 |
4.7% |
|
|
North America |
2.02 |
16.8% |
|
North America |
1.74 |
18.9% |
|
|
Global Alpha |
- |
- |
|
Global Alpha |
0.11 |
1.1% |
|
|
UK Absolute |
0.54 |
4.5% |
|
UK Absolute |
0.13 |
1.4% |
|
|
European Income |
0.19 |
1.6% |
|
European Income |
0.12 |
1.3% |
|
|
UK Value |
0.65 |
5.4% |
|
UK Value |
0.17 |
1.8% |
|
|
|
12.00 |
|
|
|
9.27 |
|
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Chairman's Statement
The external influences on markets in the past year have been dominated by concerns about the consequences of Donald Trump's presidency in the USA and Vladimir Putin's ongoing leadership in Russia together with continuing unrest in the Middle East. Closer to home, we remain unclear on what the potential impact of Brexit might be. Despite this, global economies have continued to grow and equity markets have been supportive in both developed and developing markets, providing active managers with a broad set of investment opportunities.
This financial year, a record in terms of profit and net flows, was particularly gratifying with our assets under management (AUM) increasing by 29.0% from £9.3bn to £12.0bn. This increase was a combination of market uplift, strong fund outperformance and net fund inflows of £1.9bn. Net quarterly inflows began improving in the second half of the previous financial year and this positive momentum continued to improve throughout the year.
The results are pleasing given the continuing competition from the rise of passive fund investing by asset allocators as well as the impact on risk-appetite from the uncertainty that Brexit and other geopolitical threats create.
Of our eleven strategies which remained open during the year, eight grew their AUM over the year. This is an improvement over the prior financial year when four of our strategies experienced AUM declines.
The barometer of the health of our Company is investor demand for our fund strategies which is manifested by positive net flows to our funds. Net inflows are a result of compelling and differentiated investment outcomes as well as effective sales and client servicing functions. 85.0% of our total AUM outperformed respective benchmarks during the year, averaging double-digit absolute returns for clients in the process and 99.0% of our UCITS funds are ranked in the top quartile against their Lipper peer universe since inception.
During the year, a number of awards were bestowed on our fund managers with the Technology and UK Absolute Equity teams picking up awards in the UK and our Global Insurance team receiving an award in the Far East.
Results
Profit attributable to ordinary shareholders doubled from £16.0m to £32.8m with diluted earnings per share increasing 104.1% from 17.0p to 34.7p. Adjusted diluted earnings per ordinary share, after adjusting for share-based payments on preference shares and deferred remuneration costs, rose by 79.4% from 20.4p to 36.6p.
Our Balance Sheet remains strong with net assets of £87.7m and net cash of £87.9m.
Dividend
The Company has come out of a two-year period during which it has paid an uncovered dividend.
This year, the Company's results have shown that the past confidence placed in its improving performance was well placed as if the dividend had been maintained at the level of the past two years it would have been covered 1.46 times by this year's earnings.
Going forward we would expect in normal circumstances to pay an annual dividend within a range of 55% and 85% of adjusted total earnings, dependent on the scale of performance fees in the relevant year.
Over the medium term we would also expect dividends to increase broadly in line with the increase in core earnings.
Retained surplus cash, particularly in years of higher performance fees, would be expected to finance share buy backs in addition to financing the future growth of the business.
The second interim dividend to be paid will be 22.0p (2017: 19.5p) making a total annual dividend of 28.0p (2017: 25.0p).
Leadership change
We experienced a seamless transition in leadership following Gavin Rochussen replacing Tim Woolley as Chief Executive in July last year. Tim left Polar Capital with a group of high quality fund managers and strong momentum in terms of AUM and profit growth. From this base Gavin was well placed to grow the business. While being clear that there would be no fundamental change to the ethos and philosophy behind Polar Capital's active style of fund management, Gavin has set out a clear growth and diversification strategy for the business which he has begun to implement.
Board changes
Tim Woolley, a co-founder of the Company, having retired as CEO last year, remained on the Board as a Non-Executive Director. He has now indicated he wishes to stand down from the Board at the AGM. We thank him for the enormous contribution he has made to the success of Polar Capital since its foundation in 2001 and wish him well for his life beyond Polar Capital.
Hugh Aldous, who has been a member of the Board and Chairman of the Audit Committee since 2007, is also standing down from the Board. We thank him for the wise and professional advice and great commitment he has given to Polar Capital over the last 11 years.
Following the appointment of a new CEO last year we are now in the process of refreshing the non-executive element of the Board. An announcement of the appointment of new Non- Executive Directors to the Board, including a new Chairman of the Audit Committee, is expected to be made in the near future.
Annual General Meeting
Once again our AGM will be held at our offices at 16 Palace Street, London, SW1E 5JD. The meeting will be on 25 July 2018 commencing at 2:30pm. Although we do not give a trading update at the meeting, I encourage shareholders to attend so that they can meet the Directors after the meeting.
Details of the AGM are contained in the separate notice of meeting.
Outlook
The investment performance delivered to our clients and record returns produced for our shareholders in the financial year were made possible by our committed and loyal partners and employees. I would like to thank all those at Polar Capital who contributed to a highly satisfactory year.
As well as market, stock and sector-specific issues that our managers encounter on a daily basis, we face a number of macro and geopolitical challenges. The industry faces the dual headwinds of rising regulatory cost and fee pressure as low- cost passive investing has gained popularity. We believe it is critically important that we remain faithful to our active management philosophy and our core business model in order to navigate future challenges.
Our new financial year has started strongly which enables us, significant market corrections apart, to view the year ahead with confidence.
Tom Bartlam
Chairman
22 June 2018
Chief Executive's Report
This Annual Report is my first as Chief Executive of Polar Capital, having assumed the role in July last year. I would like to thank my predecessor, Tim Woolley, who was not only CEO but also a co-founder of the Company. He successfully navigated this niche active fund management boutique through challenging times following the financial crisis and has handed over a sound Company with a strong culture and compelling business model.
Market background
The economic backdrop to the year was one of growth with global GDP increasing 3.7% in 2017 and forecast growth for 2018 of 3.9% (Source: IMF).
Equity markets benefited from continued supportive fiscal and monetary policy with broad based global growth in 2017 emanating from all 46 countries tracked by the OECD, the first year this has happened since 2007. Markets during the year reached record levels.
During the year under review, the FTSE All Share Index TR (GBP) was up 1.4%, the MSCI North America Index TR (USD) was up 12.9%, the MSCI All-Country World Index TR (USD) was up 14.9%, Topix TR (Yen) was up 15.0%, the MSCI Emerging Markets Index TR (USD) was up 24.8% and the Dow Jones World Technology Index TR (USD) was up 26.6%.
Volatility during the year was low compared to the historic average although it did increase during the first quarter of 2018 as the interest rate cycle started an upward trend with the US 10-year treasury rising to 3.0%. The Dow Jones, for example, reached a peak level of 26,616 on 26 January 2018 but sold-off almost immediately as the US Federal Reserve released record unemployment numbers and data prompting inflation concerns on the same day.
Despite increased volatility and the market correction in February of this year, most indices have subsequently recovered and continued to advance in recent months.
Initial market concerns about US tariff policy and other geopolitical tensions seem to have been overcome by strong company earnings and continued global growth. Whilst both the UK and Europe are experiencing growth headwinds, the US economy continues to surprise on the upside. UK equities have continued to suffer from Brexit concerns and European equities have, more recently, been affected by rising government bond yields in southern Europe triggered by political concerns in Italy.
Fund performance
Fund performance this financial year has been generally excellent across our range of open and closed-ended funds. The net performance fee earned by the open-ended UCITS funds in the 2017 calendar year was at a record net amount of £15.3m compared to £1.2m in the prior year. Performance against both benchmark and peers has been positive across the fund range with only a few exceptions.
As at 31 March 2018, the Lipper percentile rankings for our UCITS fund range indicated 99.0% of the funds AUM were in the top quartile against peer group since inception, with 85.0% and 78.0% in the top quartile over five-years and three-years respectively.
This year, on average, our long-only UCITS funds outperformed their passive benchmarks, net of all fees by 2.2%. From inception this figure increases to 3.2% annualised.
AUM and fund flows
As stated previously, AUM increased by 29.0% from £9.3bn to £12.0bn with £1.9bn contributed by net inflows and £800m from market uplift and performance. Net inflows were positive across 16 of our 22 funds with six funds registering negative net flows in addition to those four funds that were terminated during the year.
The UK Value Opportunities Fund which was launched in January 2017 was the largest beneficiary of our net inflows as a consequence of a compelling process and outstanding performance. It received net inflows of £464m taking the fund to £650m. The Global Technology Fund received £372m followed by the UK Absolute Return Fund which had subscriptions of £337m. The net flows into the two UK funds was pleasing given the backdrop of muted industry-wide demand for UK equities. The Global Insurance Fund benefitted from £309m of net inflows taking total fund assets to £1.2bn. The Automation and Artificial Intelligence Fund, managed by our Technology team, which was launched in October 2017, received £224m. The North American Fund had net subscriptions of £170m making it our largest Fund at £2.0bn. Coinciding with a year of compelling performance, the Income Opportunities Fund attracted a net £155m while the Biotechnology Fund received a net £118m over the year. Net inflows of £69m and £66m into the Healthcare Opportunities Fund and European Income Fund respectively were also notable.
As highlighted in my Interim Report, four funds were terminated in the fourth quarter of 2017; the Global Alpha Fund, International Alpha Fund, European Conviction Fund and Global Emerging Market Growth Fund resulting in net outflows across all four funds of £182m. The majority of these assets were redeployed by investors into other Polar Capital Funds.
Over the year both the Japan Funds as well as the European Forager Fund had net outflows - £34m and £63m respectively. However, the extent of the net redemptions was significantly less than the level of outflows from these funds in the previous year. It is pleasing to note that post year-end the Forager Fund has had a significant institutional inflow. The Emerging Markets Income Fund had a challenging year in terms of performance and redemptions with a total net outflow of £191m across the UCITS fund and a separate account mandate.
In line with our stated philosophy of managing capacity in our fund strategies to preserve performance, the UK Absolute Return Fund was soft-closed during the year and the Healthcare Opportunities Fund remains closed for new investors.
The Healthcare Investment Trust was successfully restructured resulting in a rolled-over Investment Trust with net assets of £270m at year-end and a further seven-year life.
At strategy level, of the eleven strategies which remained open at year end, eight had net inflows over the year.
New investment team
We have recently announced the arrival of an Emerging Markets team and the launch of the Emerging Markets Stars Fund, the Asia ex-Japan Fund and a China Focus Fund. The five strong team previously and successfully managed a multi-billion dollar fund strategy for both retail and institutional investors delivering first quartile performance over three and five years. We anticipate opening a research office in Shanghai to ensure closer proximity to the important and growing Chinese equity market.
Results
|
|
31 March 2018 £'m |
31 March 2017 £'m |
Change |
|
Net management fees (net of commissions and fees payable) |
90.3 |
67.9 |
33.0% |
|
Core operating profit |
27.8 |
20.9 |
33.0% |
|
Performance fee profit |
15.3 |
1.2 |
|
|
Other income |
3.3 |
1.5 |
|
|
Profit before share-based payments on preference shares and tax |
46.4 |
23.6 |
96.6% |
|
Share-based payments on preference shares |
(5.1) |
(3.2) |
|
|
Profit before tax |
£41.3m |
£20.4m |
102.5% |
|
Profit attributable to ordinary shareholders |
£32.8m |
£16.0m |
|
|
Adjusted diluted earnings per share (non-GAAP measure) |
36.6p |
20.4p |
79.4% |
Net profit before tax was £41.3m, an increase of 102.5% on the £20.4m reported in the prior year.
Profit attributable to ordinary shareholders doubled from £16.0m to £32.8m.
Core profit (excluding performance fees and other income) for the year was £27.8m, an increase of 33.0% on the previous year.
The marked increase in profitability was due to a combination of market uplift, fund performance, performance fees, net inflows and investment gains on seed capital. Net retained performance fees, after deducting the fund managers' shares, amounted to £15.3m compared to a modest £1.2m in the prior year.
The adjusted diluted earnings per share, adjusting for share-based payments on preference shares and deferred remuneration costs, rose by 79.4% to 36.6p from 20.4p in the prior year.
Regulatory changes
Two significant regulatory changes have affected our investment operations during the financial year. The Markets in Financial Instruments Directive II (MiFID II) which governs how we target investors, trade on their behalf and how those trades are monitored became effective on 3 January 2018. We have agreed with our clients how research costs are funded following the MiFID II implementation and will reassess the appropriateness of these arrangements during the course of the current financial period. The General Data Protection Regulation (GDPR) which determines how we communicate with clients as well as use and store their data became effective on 25 May 2018. Client agreements and mandates were all amended for our updated privacy policy. The industry welcomed the release of the FCA Asset Management Market Study on 5 April 2018 and its findings are, by and large, already considered as best practice by Polar Capital.
Strategy
In line with a focus on capacity management to preserve the performance of existing fund strategies, it is important to add complementary teams and extend existing team capability. The emphasis will be on growing by adding to our range of fund strategies in terms of style and process while also diversifying the client base geographically and by client segment. The Company has already made modest progress, in developing an institutional offering and also in developing client relationships in Asia and North America. We anticipate that once the new Emerging Markets team settles and establishes a track record, it will have appeal to institutional clients.
In order to increase our client servicing presence in the European markets, we will, subject to regulatory approval, be opening an office in Paris where certain key functions will be undertaken for the Company. We have also recruited a dedicated resource to focus on building our presence in the Nordic region - a further key element of our regional diversification strategy.
Outlook
It is comforting that the majority of our strategies have performed ahead of benchmark in the more volatile markets experienced in the first quarter of 2018. While there remains geopolitical tension and the finalisation of Brexit terms cast a shadow, we are well positioned as fundamental research-driven, active fund managers to find opportunities globally and to continue to deliver above average returns for our clients.
Gavin Rochussen
Chief Executive
22 June 2018
Financial Review
Introduction
Since the IPO of the Company in 2007 the face of the Consolidated Income Statement has included a separate line identifying a Share Based Payments (SBP) charge. The origin of the charge was the existence of the Group's Preference Shares that are held by the Group's lead investment managers, a feature of which is the future issuance of equity in exchange for the forfeiture of a manager's economic interest in the management fee profits of their business. Despite being designed to be earnings enhancing, and therefore non-dilutive, the nature of the instruments mandated a SBP charge.
The separate disclosure of the SBP charge has enabled the Group to explain the reasons for, and the maths behind, a non-GAAP adjusted Earnings Per Share (EPS) figure, a figure that has had the Preference Share component of the SBP charge excluded from the statutory EPS figure.
The arrival of the firm's Long-Term Incentive Plan (LTIP) and the imposition of deferment on bonuses has now created other contributors to the SBP charge. Suddenly the relative simplicity of the components making up the charge has gone. Therefore, this year the components of the SBP charge have been subsumed into the Operating Cost line of the Consolidated Income Statement and the notes to the accounts (note 3.6) separately disclose the make-up of the SBP charge.
In relation to the adjusted EPS figure the cost of the share-based payments charge relating to the Group's Preference Shares continues to be excluded from the IFRS derived EPS figure.
This year a second adjustment is being disclosed to the adjusted EPS figure. IFRS requires that any compensation deferred is to be accounted for over the period that the deferred amounts vest. The Group considers it prudent, and consistent with the principle of matching, that the adjusted EPS figure accounts for such costs in the period in which the compensation triggering the deferment is earned. In 2018 this has resulted in a 3.4p reduction to the adjusted EPS figure (2017: nil).
Results for the year - Revenues
|
Revenues |
31 March 2018 £'m |
31 March 2017 £'m |
|
Net management fees (net of commissions and fees payable) |
90.3 |
67.9 |
|
Performance fees |
35.6 |
2.7 |
|
Profit/(loss) on forward currency contracts |
- |
(2.4) |
|
Total net revenues |
125.9 |
68.2 |
|
Other income |
3.3 |
1.5 |
|
Net income |
£129.2m |
£69.7m |
The quantum of management fees earned by the Group is conventionally a factor of, firstly, the quantum of Assets Under Management (AUM) managed by the Group and secondly, the fee rate charged on the AUM.
The increase in the Group's net management fees from £67.9m in 2017 to £90.3m this year, a 33% increase, is simply a function of the increase in the Group's AUM.
The excellent relative performance of the Group's funds has resulted in the significant uplift in performance fees revenue. The variance from last year highlights both the disappointing quantum of such fees in 2017 as well as the fact that the 2018 figure was the highest level of performance fees that the Group has produced in its 18-year history.
Results for the year - Costs
|
Costs |
31 March 2018 £'m |
31 March 2017 £'m |
|
Salaries, bonuses and other staff costs |
20.9 |
16.9 |
|
Core distributions1 |
22.9 |
14.8 |
|
Compensation costs |
43.8 |
31.7 |
|
NIC on share options |
1.7 |
(0.6) |
|
Share-based payments2 |
7.6 |
4.1 |
|
Other operating costs |
14.5 |
12.6 |
|
Core operating costs |
67.6 |
47.8 |
|
Performance fee interests3 |
20.3 |
1.5 |
|
Total operating costs |
£87.9m |
£49.3m |
1. Including share awards under deferment plan of £0.3m (2017: nil).
2. Share-based payments on preference shares, Group share awards and LTIPs.
3. Including share awards under deferment plan of £0.8m (2017: nil)
Total operating costs rose to £87.9m from £49.3m last year.
The first comment to make is that, as identified in my introduction, this year Operating Costs include the cost of SBP that amount to £8.7m in 2018 (2017: £4.1m). A separate analysis of this cost is detailed in the share-based payments section that follows.
The increase in salaries, bonuses and other staff costs was a product of the increase in head count in the firm (year end staff numbers increased from 116 to 122) as well as an increase in the discretionary bonuses paid following the improved performance of the Group.
The increase in core distributions was a function of the rise in management fee revenues and the management fee profitability of the firm.
The National Insurance cost on share options is a product of, and is sensitive to, the Company's share price. The reduction in the provision in 2017 resulted from the fall in the Company's share price over the year and this year the rise in the Company's share price has increased the necessary provision.
The increase in other operating costs is a product of mainly two factors. The first being the existence for the first time of one quarter's MiFID II research costs (the costs commenced from 1 January 2018). The second component is an increase in the Group's general IT costs as continuing investment is made into the firm's infrastructure.
The rise in performance fee interests to £20.3m from £1.5m last year is directly correlated to the increase in performance fee revenues.
Share-based payments
The make-up of the cost of share-based payments as disclosed above is as follows:
|
|
31 March 2018 £'m |
31 March 2017 £'m |
|
Cost attributed to preference shares |
5.1 |
3.2 |
|
Cost attributed to LTIPs and initial shares |
1.8 |
- |
|
Cost attributed to Group share awards |
0.7 |
0.9 |
|
Cost attributed to deferred bonus awards |
1.1 |
- |
|
Total cost of share-based payments |
£8.7m |
£4.1m |
The increase in this charge is dominated by the increase in the charge associated with the group's preference shares (see below) and an estimated charge for LTIP awards for the 2018 year end.
Results for the year - Profits
|
Profits |
31 March 2018 £'m |
31 March 2017 £'m |
|
Core operating profit1 |
27.8 |
20.9 |
|
Performance fee profit2 |
15.3 |
1.2 |
|
Other income |
3.3 |
1.5 |
|
Profit before share-based payments and tax |
46.4 |
23.6 |
|
Share-based payments on preference shares |
(5.1) |
(3.2) |
|
Profit before tax |
£41.3m |
£20.4m |
1. Including cost of LTIP, Group share awards and deferred share awards to 31 March 2018 of £2.8m (2017: £0.9m).
2. Including cost of deferred share awards of £0.8m (2017: nil).
The headline profit before tax for the year has increased to £41.3m from last year's £20.4m.
The Group believes that the best measure of the Group's profitability is the profit before share-based payments on preference shares and tax. The reason for excluding the share-based payments on preference shares is that the Group's preference shares as an instrument deliver, when they vest, an uplift to EPS and are not a detractor. On this basis the Group has delivered a rise in profits to £46.4m compared to last year's £23.6m. The analysis of the different components of profits shows that:
• Core operating profits
The increase in profits reflects the rise in management fee revenues driven by the increase in average value of assets managed over the year.
• Performance fee profits
Stronger performance across the product range compared to last year has resulted in the significant improvement in performance fee profits.
• Other income
The increase in contribution is a product of the good performance of the investments held on the balance sheet.
Earnings per share
The effect that the charge for share-based payments on preference shares and deferment have on the EPS figures of the Group is as follows:
|
|
31 March 2018 Pence |
31 March 2017 Pence |
|
Diluted earnings per share |
34.7 |
17.0 |
|
Impact of share- based payments - preference shares only |
5.3 |
3.4 |
|
Impact of deferment, where IFRS defers cost into future periods |
(3.4) |
- |
|
Adjusted diluted EPS |
36.6p |
20.4p |
Preference shares
A separate class of preference share is issued by Polar Capital Partners Limited for purchase by each new team of fund managers on their arrival at the Company or in certain cases on the launch of a new fund. These shares provide each manager with an economic interest in the funds that they run and ultimately enable the manager to convert their interest in the revenues generated from their funds into equity in Polar Capital Holdings plc. The equity is awarded in return for the forfeiture of their current core economic interest and vests over three years with the full quantum of the dilution being reflected in the diluted share count (and so diluted EPS) from the point of conversion. The event has been designed to be, at both the actual and the diluted levels, earnings enhancing to shareholders.
In the year to 31 March 2018 (as was also the case in the year to March 2017) there were no new conversions of preference shares into Polar Capital Holdings equity.
As at 31 March 2018 three sets of preference shares have the ability to call for a conversion. The call has to be made on or before 30 November 2018 if any conversion is to take place with effect from 31 March 2018. It is the relative success and profitability of the funds represented by these three sets of preference share that accounts for the increased cost attributed to preference shares that has been identified above (2018: £5.1m versus 2017: £3.2m).
Balance sheet and cash
At the year end the cash balances of the Group were £87.9m (2017: £58.5m). The increase was a product of the increased profitability of the Group and was helped also by the reduction, over the year, in the Group's small portfolio of seed investments.
At the balance sheet date the Group held £18.4m of investments in its funds (2017: £22.1m).
Capital management
The Group believes in retaining a strong balance sheet. The capital that is retained in the business is used to either seed new investment products or if not so required is invested into the Group's absolute return funds as investment capital. As at March 2018 there were £9.8m of investments and £8.6m of the Group's balance sheet was invested in fledgling funds.
The Group's dividend policy is to distribute the majority of its earnings.
Business risk
Amongst the major risks to the business strategy is the loss of assets under management due to markets falling, poor investment performance or the loss of key investment personnel. These events will not only have an immediate impact on the management fees earned by the Group but also deprive the Group of possible performance fees.
Going concern
The Financial Reporting Council has determined that all companies should carry out a rigorous assessment of all the factors affecting the business in deciding to adopt a going concern basis for the preparation of the accounts.
The Directors have reviewed and examined the financial and other processes embedded in the business, in particular the annual budget process and the financial stress testing inherent in the Internal Capital Adequacy Assessment Process ("ICAAP"). On the basis of such review, and the significant liquid assets underpinning the balance sheet relative to the Group's predictable operating cost profile, the Directors consider that the adoption of a going concern basis, covering a period of at least 12 months from the date of this report, is appropriate.
BREXIT
The Group is manager of only three UK resident products and all are closed end Investment Trusts that are not marketed into continental Europe. The Group is also the appointed manager of an Irish UCITS that is distributed throughout Europe. As there remains uncertainty over the arrangements that will apply from March 2019 the Group is opening an AMF regulated subsidiary in France through which all European activities, including all European distribution, will be funnelled.
John Mansell
Finance Director
22 June 2018
Consolidated Statement of Profit or Loss For the year ended 31 March 2018
|
|
31 March 2018 £'000 |
31 March 2017 £'000 |
|
Revenue |
133,808 |
73,766 |
|
Other income |
3,350 |
1,505 |
|
Gross income |
137,158 |
75,271 |
|
Commissions and fees payable |
(7,916) |
(5,578) |
|
Net income |
129,242 |
69,693 |
|
Operating costs |
(87,965) |
(49,256) |
|
Profit for the year before tax |
41,277 |
20,437 |
|
Taxation |
(8,478) |
(4,394) |
|
Profit for the year attributable to ordinary shareholders |
32,799 |
16,043 |
|
Earnings per share |
|
|
|
Basic |
36.4p |
17.8p |
|
Diluted |
34.7p |
17.0p |
|
Adjusted basic (Non-GAAP measure) |
38.4p |
21.4p |
|
Adjusted diluted (Non-GAAP measure) |
36.6p |
20.4p |
Consolidated Statement of Comprehensive Income For the year ended 31 March 2018
|
|
31 March 2018 £'000 |
31 March 2017 £'000 |
|
Profit for the year attributable to ordinary shareholders |
32,799 |
16,043 |
|
Other comprehensive income - items that may be reclassified to profit or loss in subsequent periods |
|
|
|
Net movement on fair valuation of cash flow hedges |
1,695 |
(47) |
|
Deferred tax effect |
(322) |
18 |
|
|
1,373 |
(29) |
|
Exchange differences on translation of foreign operations |
15 |
795 |
|
Other comprehensive income for the year |
1,388 |
766 |
|
Total comprehensive income for the year, net of tax, |
34,187 |
16,809 |
All of the items in the above statements are derived from continuing operations.
Consolidated Balance Sheet as at 31 March 2018
|
|
31 March 2018 £'000 |
31 March 2017 £'000 |
|
Non-current assets |
|
|
|
Property and equipment |
1,971 |
2,402 |
|
Deferred tax assets |
3,808 |
3,478 |
|
|
5,779 |
5,880 |
|
Current assets |
|
|
|
Investment securities |
9,750 |
14,429 |
|
Assets at fair value through profit or loss |
11,679 |
9,623 |
|
Trade and other receivables |
12,923 |
10,107 |
|
Other financial assets |
833 |
- |
|
Cash and cash equivalents |
87,950 |
58,539 |
|
|
123,135 |
92,698 |
|
Total assets |
128,914 |
98,578 |
|
Non-current liabilities |
|
|
|
Provisions and other liabilities |
2,026 |
2,169 |
|
Deferred tax liabilities |
1,216 |
539 |
|
|
3,242 |
2,708 |
|
Current liabilities |
|
|
|
Liabilities at fair value through profit or loss |
1,790 |
2,170 |
|
Trade and other payables |
34,256 |
19,741 |
|
Other financial liabilities |
- |
1,350 |
|
Current tax liabilities |
1,958 |
1,869 |
|
|
38,004 |
25,130 |
|
Total liabilities |
41,246 |
27,838 |
|
Net assets |
87,668 |
70,740 |
|
Capital and reserves |
|
|
|
Issued share capital |
2,335 |
2,286 |
|
Share premium |
18,872 |
18,631 |
|
Investment in own shares |
(9,221) |
(3,747) |
|
Capital and other reserves |
11,441 |
7,840 |
|
Retained earnings |
64,241 |
45,730 |
|
Total equity - attributable to ordinary shareholders |
87,668 |
70,740 |
Consolidated Statement of Changes in Equity For the year ended 31 March 2018
|
|
Issued share capital £'000 |
Share premium
£'000 |
Investment in own shares £'000 |
Capital reserves
£'000 |
Other reserves
£'000 |
Retained earnings
£'000 |
Total equity
£'000 |
|
As at 1 April 2016 |
2,280 |
18,509 |
(747) |
695 |
6,797 |
48,163 |
75,697 |
|
Profit for the year |
- |
- |
- |
- |
- |
16,043 |
16,043 |
|
Other comprehensive income |
- |
- |
- |
- |
766 |
- |
766 |
|
Total comprehensive income |
- |
- |
- |
- |
766 |
16,043 |
16,809 |
|
Dividends paid to shareholders |
- |
- |
- |
- |
- |
(22,549) |
(22,549) |
|
Dividends paid to third-party interests |
- |
- |
- |
- |
- |
(22) |
(22) |
|
Issue of shares |
6 |
122 |
- |
- |
- |
- |
128 |
|
Own shares acquired |
- |
- |
(3,000) |
- |
- |
- |
(3,000) |
|
Share-based payment |
- |
- |
- |
- |
- |
4,095 |
4,095 |
|
Current tax in respect of employee share options |
- |
- |
- |
- |
47 |
- |
47 |
|
Deferred tax in respect of employee share options |
- |
- |
- |
- |
(465) |
- |
(465) |
|
As at 1 April 2017 |
2,286 |
18,631 |
(3,747) |
695 |
7,145 |
45,730 |
70,740 |
|
Profit for the year |
- |
- |
- |
- |
- |
32,799 |
32,799 |
|
Other comprehensive income |
- |
- |
- |
- |
1,388 |
- |
1,388 |
|
Total comprehensive income |
- |
- |
- |
- |
1,388 |
32,799 |
34,187 |
|
Dividends paid to shareholders |
- |
- |
- |
- |
- |
(22,934) |
(22,934) |
|
Dividends paid to third-party interests |
- |
- |
- |
- |
- |
(34) |
(34) |
|
Issue of shares |
49 |
241 |
- |
- |
- |
(46) |
244 |
|
Own shares acquired |
- |
- |
(5,474) |
- |
- |
- |
(5,474) |
|
Share-based payment |
- |
- |
- |
- |
- |
8,726 |
8,726 |
|
Current tax in respect of employee share options |
- |
- |
- |
- |
1,564 |
- |
1,564 |
|
Deferred tax in respect of employee share options |
- |
- |
- |
- |
649 |
- |
649 |
|
As at 31 March 2018 |
2,335 |
18,872 |
(9,221) |
695 |
10,746 |
64,241 |
87,668 |
Consolidated Cash Flow Statement For the year ended 31 March 2018
|
|
31 March 2018 £'000 |
31 March 2017 £'000 |
|
Cash flows generated from operating activities |
|
|
|
Cash generated from operations |
57,550 |
12,913 |
|
Tax paid |
(6,142) |
(3,662) |
|
Net cash inflow generated from operating activities |
51,408 |
9,251 |
|
Investing activities |
|
|
|
Interest received |
68 |
28 |
|
Investment income |
549 |
525 |
|
Sale of investment securities |
3,363 |
9,160 |
|
Purchase of investment securities |
(3,261) |
(11,479) |
|
Sale of assets at fair value through profit or loss |
12,493 |
29,575 |
|
Purchase of assets at fair value through profit or loss |
(11,020) |
(28) |
|
Purchase of property and equipment |
(77) |
(41) |
|
Cash proceeds from disposal of consolidated seed investment |
4,600 |
- |
|
Net cash inflow generated from investing activities |
6,715 |
27,740 |
|
Financing activities |
|
|
|
Dividends paid to shareholders |
(22,934) |
(22,549) |
|
Issue of share capital |
244 |
124 |
|
Purchase of own shares |
(5,474) |
(3,000) |
|
Third-party subscription into consolidated funds |
485 |
908 |
|
Third-party redemptions from consolidated funds |
(857) |
(2,502) |
|
Dividends paid to third-party interests |
(34) |
(22) |
|
Net cash outflow from financing activities |
(28,570) |
(27,041) |
|
Net increase in cash and cash equivalents |
29,553 |
9,950 |
|
Cash and cash equivalents at start of the year |
58,539 |
48,862 |
|
Effect of exchange rate changes on cash and cash equivalents |
(142) |
(273) |
|
Cash and cash equivalents at end of the year |
87,950 |
58,539 |
Selected notes to the Financial Statements for the year ended 31 March 2018
Principal Accounting Policies
Corporate information
Polar Capital Holdings plc (the 'Company') is a public limited company registered in England and Wales whose shares are traded on the Alternative Investment Market ("AIM") of the London Stock Exchange.
Group information
The consolidated financial statements of the Group include the operating subsidiaries listed below. All operating subsidiaries, other than Polar Capital Partners Limited, were indirectly held. All operating subsidiaries are wholly owned, except for Polar Capital LLP in which Polar Capital Partners Limited has contributed 99.5% of the capital.
|
Name |
Country of incorporation |
Registered office |
Principal activities |
|
Polar Capital Partners Limited |
UK |
16 Palace Street, London |
Services company |
|
Polar Capital Secretarial Services Limited |
UK |
16 Palace Street, London |
Dormant |
|
Polar Capital Partners (Jersey) Limited |
Jersey |
12 Castle Street, St Helier, Jersey |
Investment management |
|
Polar Capital (America) Corporation |
USA |
2711 Centreville Road, Wilmington, USA |
Investment advisory |
|
Polar Capital Limited Liability Partnership |
UK |
16 Palace Street, London |
Investment management |
The consolidated financial statements of the Group also include the following seed capital investments which were judged to be subsidiaries or associates of the Group as at 31 March 2018:
|
Name |
Country of incorporation |
Registered office |
Principal activities |
Percentage of ordinary shares held |
|
Polar Capital European Income Fund |
Ireland |
4 Georges Court, 54-62 Townsend Street, Dublin |
UCITS sub-fund |
82% |
Basis of preparation
The consolidated Group financial statements have been prepared on a going concern basis in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and the provisions of the Companies Act 2006 applicable to companies reporting under IFRS.
The consolidated financial statements have been prepared under the historical cost convention, modified by the measurement at fair value of certain financial assets and liabilities and derivative financial instruments. The consolidated financial statements are presented in Sterling and all values are rounded to the nearest thousand (£'000), except when otherwise stated.
Basis of consolidation
The consolidated financial statements of the Group comprise the financial statements of the Company and its subsidiaries as at 31 March 2018. Subsidiaries are those entities over which the Group has control. The Group controls an investee if, and only if, the Group has:
• Power over the investee;
• Exposure, or rights, to variable returns from its involvement with the investee;
• The ability to use its power over the investee to affect returns.
The Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including the purpose and design of an investee, relevant activities, substantive and protective rights, voting rights and potential voting rights.
Seed capital investments in funds that the Group manages are accounted for as subsidiaries, associates or financial assets at fair value through profit or loss (FVTPL) depending on the holdings of the Group, on the level of influence and control that the Group is judged to have and whether the Group assesses it is acting as an agent or principal for its holdings in the seed capital investments. There is no fixed minimum percentage at which the Group consolidates, and each exposure is reviewed individually.
Where the Group concludes it is acting as a principal the entity is consolidated. This assessment is based on the Group's total exposure. This incorporates direct holdings, income earned from management and performance fees and the assessed strength of third-party kick-out rights.
The Group concludes that it acts as an agent when the power it has over the fund is deemed to be exercised for the benefit of third-party investors. The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Subsidiaries are fully consolidated from the date on which the Group obtains control, and continue to be consolidated until the date when such control ceases.
The financial statements of the subsidiaries are prepared for the same reporting period as the parent company and where necessary, adjustments are made to the financial statements of the subsidiaries to bring their accounting policies in line with those of the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation.
Where external investors hold redeemable shares in funds controlled by the Group, the portion of profit or loss and net assets held by these third-party interests is included within other income in the consolidated statement of profit or loss and as financial liabilities at FVTPL in the consolidated balance sheet respectively.
When the Group loses control over a subsidiary, it derecognises the related assets, liabilities, third-party interest and other components of equity, while any resultant gain or loss is recognised in profit or loss. Any investment retained is recognised at fair value.
Net cashflows on initial consolidation or deconsolidation are presented as investing activities within the consolidated cashflow statement. Cashflows from third-party interests into consolidated funds are presented as financing activities.
Investment securities
Investment securities represent securities, other than derivatives, held by consolidated funds. These securities are designated as FVTPL and are measured at fair value with gains and losses recognised through the consolidated statement of profit or loss.
Financial liabilities at fair value through profit or loss
Financial liabilities at FVTPL are carried at fair value, with gains and losses recognised in the consolidated income statement within other income in the period in which they arise. Financial liabilities at FVTPL relate to third-party interests in consolidated funds which are designated as at FVTPL.
Revenue recognition
Revenue represents fees receivable (excluding value added tax) for discretionary investment management services during the period.
Management fees are based on a percentage of assets under management as set out in the relevant investment management agreements. The fees are recognised in the period in which the services is provided and it is probable that the fee will be received.
Performance fees are based on a percentage of investment performance achieved relative to predefined benchmarks as set out in the relevant investment management agreements. The fees are recognised at the end of the period over which the performance is measured, when a reliable estimate of fee can be made, and it is almost certain that the fee will be received.
Commissions and fees payable
Commissions and fees payable to third parties are in respect of management of investment management contracts. Commissions, distribution and research fees payable to third parties are recognised over the period for which the service is provided.
Geographical analysis of income (based on the residency of source)
|
|
31 March 2018 £'000 |
31 March 2017 £'000 |
|
UK |
17,497 |
13,238 |
|
Ireland |
108,156 |
54,922 |
|
Cayman |
5,571 |
5,316 |
|
Europe |
2,568 |
2,713 |
|
Gain/(loss) on forward currency contracts |
16 |
(2,423) |
|
|
133,808 |
73,766 |
Analysis of income by type of fees
|
|
31 March 2018 £'000 |
31 March 2017 £'000 |
|
Investment management and research fees |
98,153 |
73,471 |
|
Investment performance fees |
35,639 |
2,718 |
|
Gain/(loss) on forward currency contracts |
16 |
(2,423) |
|
|
133,808 |
73,766 |
Net gains and losses on forward currency contracts used to hedge management fees derived from non-Sterling based AUM are included within revenue. This presentation better reflects the substance of these transactions and provides more relevant information about the Group's revenue.
Earnings per Share
A reconciliation of the figures used in calculating the basic, diluted and adjusted earnings per share (EPS) figures is as follows:
|
|
31 March 2018 £'000 |
31 March 2017 £'000 |
|
Earnings |
|
|
|
Profit after tax for purpose of basic and diluted EPS |
32,799 |
16,043 |
|
Adjustments (post tax): |
|
|
|
Add back cost of share-based payments on preference shares |
5,045 |
3,206 |
|
Less net amount of deferred staff remuneration |
(3,237) |
- |
|
Profit after tax for purpose of adjusted basic and adjusted diluted EPS |
34,607 |
19,249 |
|
|
31 March 2018 £'000 |
31 March 2017 £'000 |
|
Weighted average number of shares |
|
|
|
Weighted average number of ordinary shares, excluding own, shares for purposes of basic and adjusted basic EPS |
90,104,708 |
90,136,239 |
|
Effect of dilutive potential shares - share options |
4,513,728 |
4,289,806 |
|
Weighted average number of ordinary shares, for purpose of diluted and adjusted diluted EPS |
94,618,436 |
94,426,045 |
|
|
31 March 2018 Pence |
31 March 2017 Pence |
|
Earnings per share |
|
|
|
Basic |
36.4p |
17.8p |
|
Diluted |
34.7p |
17.0p |
|
Adjusted basic |
38.4p |
21.4p |
|
Adjusted diluted |
36.6p |
20.4p |
Alternate Performance Measures (APMs)
The Group uses the following Non-GAAP APMs:
Core operating profit
Definition: Profit before performance fee profits, other income and tax.
Reconciliation: Financial Review.
Reason for use: to present users of the accounts with a clear view of what the Group considers to be the results of its underlying operations before items which may either be non-recurring or non-cash in nature and taxation.
Performance fee profit
Definition: Gross performance fee income less performance fee interests due to staff.
Reconciliation: Financial Review.
Reason for use: to present users of the accounts with a clear view of the net amount of performance fee earned by the Group after accounting for staff remuneration payable that is directly attributable to performance fee revenues generated.
Net management fee
Definition: Gross management fee income less commissions and fees payable.
Reconciliation: Financial Review.
Reason for use: to present a subtotal of fee revenue after accounting for items without which some of the revenue would not have been earned.
Core distributions
Definition: Variable compensation payable to investment teams.
Reconciliation: Financial Review.
Reason for use: to present users of the accounts with additional information not required for disclosure by accounting standards, thereby assisting users of the accounts in understanding key components of variable costs.
Adjusted diluted earnings per share
Definition: Profit after tax but (a) excluding cost of share-based payments on preference shares and (b) allowing for the net cost of deferred staff remuneration, divided by the weighted average number of ordinary shares.
Reconciliation: Earnings per share note.
Reason for use: to present users of the accounts with a clear view of what the Group considers to be the distributions from its underlying operations. The Group believes that (a) as the preference share awards have been designed to be earnings enhancing to shareholders (See Financial Review) adjusting for this non-cash item provides a better understanding of the financial performance of the Group and (b) comparing staff remuneration and profits generated in the same time period (rather than deferring remuneration over a longer vesting period) allows users of the accounts to again a better understanding of the Group's results and their comparability period on period.
Profit before share-based payments on preference shares
Definition: Profit before tax but excluding cost of share-based payments on preference shares.
Reconciliation: Financial Review.
Reason for use: The Group believes that as preference share awards have been designed to be earnings enhancing to shareholders (see Financial Review) adjusting for this non-cash item provides a better understanding of the financial performance of the Group.
Status of results announcement
The Board of Directors approved this results announcement on 22 June 2018. Whilst the financial information included in this announcement has been prepared in accordance with International Financial Reporting Standards ("IFRS") as endorsed by the European Union, this announcement does not itself contain sufficient information to comply with all the disclosure requirements of IFRS and does not constitute statutory accounts of the Group for the years ended 31 March 2018 or 31 March 2017.
The financial information has been extracted from the statutory accounts of the Group for the years ended 31 March 2018 and 31 March 2017. The auditors reported on those accounts; their reports were unqualified and did not contain a statement under either Section 498 (2) or Section 498 (3) of the Companies Act 2006 and did not include references to any matters to which the auditor drew attention by way of emphasis.
The statutory accounts for the year ended 31 March 2017 have been delivered to the Registrar of Companies and those for the year ended 31 March 2018 will be delivered to the Registrar of Companies in due course.
Copies of Report and Accounts
The full annual report and accounts will be posted to shareholders in June 2018 and copies will be available thereafter from the Company Secretary at the Company's Registered Office, 16 Palace Street, London SW1E 5JD (020 7227 2700) or from the Company's website at www.polarcapital.co.uk.
Annual General Meeting
The Annual General Meeting will be held at 2:30pm on 25 July 2018 at the offices of the Company at 16 Palace Street, London SW1E 5JD.
Directors
T H Bartlam Non-executive Chairman
G M Rochussen Chief Executive
J B Mansell Chief Operating Officer, Finance Director
H G C Aldous Non-executive Director, Chairman of Audit Committee
B J D Ashford-Russell Non-executive Director
J M B Cayzer-Colvin Non-executive Director
W E Robbins Non-executive Director
M W Thomas Non-executive Director, Chairman of Remuneration Committee
T J Woolley Non-executive Director
Forward looking statements
This preliminary announcement contains certain forward looking statements with respect to the financial condition, results of operations and businesses and plans for Polar Capital Holdings plc. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that have not yet occurred. There are a number of different factors that could cause actual results or developments to differ materially from those expressed or implied by these forward looking statements. Nothing in this statement should be construed as a profit forecast.
The release, publication, transmission or distribution of this announcement in jurisdictions other than the United Kingdom may be restricted by law and therefore persons in such jurisdictions into which this announcement is released, published, transmitted or distributed should inform themselves about and observe such restrictions. Any failure to comply with the restrictions may constitute a violation of the securities laws of any such jurisdiction.
Neither the contents of the Company's website nor the contents of any website accessible from the hyperlinks on the Company's website (or any other website) is incorporated into or forms part of this announcement.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
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