Global strength Local knowledge Aberdeen Asset Management PLC Annual Report and Accounts 2012
Our culture We believe in locating our investment and client service teams in or near the markets in which we invest or where our clients are based. The Group has grown rapidly in the last 29 years and values a flat management structure and being an open, diverse and accessible employer. To our clients, we believe we are transparent and approachable and we aim to deliver to the highest client service standards. We champion local decision making, close-knit teams and interdependence among our offices worldwide.
Our responsibilities We see our role as being one where we do our utmost to provide the best possible working conditions for our employees, to protect the environment, to manage our business in a fair and ethical manner. Our corporate responsibility website may be found at www.aberdeen-asset.com/csr.
Overview 1 Highlights 2 Chairman’s statement 4 Where we operate 6 Market and industry overview
Business model 10 Business model 12 Strategy 14 Our investment process 18 Our people
Corporate information 127 Principal offices 129 Corporate information 129 Financial calendar
The year ending 30 September 2012 was, in general, another period of economic and market uncertainty, nevertheless, Aberdeen managed a number of notifiable achievements. We saw net revenue and underlying pre-tax profit increase by 11% and 15% respectively, and the net cash position grow to £266.4 million by the year end. A 21% increase in underlying earnings per share has enabled us to propose a total dividend for the year of 11.5p per share, a 28% increase on 2011. Over the year, our share price rose steadily, resulting in a year end market capitalisation of £3.7 billion. In March, Aberdeen was promoted to the FTSE-100 index for the first time in its 29 year history.
These results are directly attributable to the strong investment performance that is the product of a disciplined and rigorous investment process, illustrating that the Group flourishes when our clients prosper.
Financial highlights Net revenue for the year of £869.2 million was 11% higher than in 2011, reflecting healthy growth in recurring management fees, supplemented by increased performance fee income. The quality of income remains high, with recurring fees accounting for 94% of net revenue and the blended average fee rate rising to 45.1 basis points (2011: 41.2 basis points).
Underlying operating profit, which is stated before amortisation of intangible assets, increased by 14% to £352.7 million (2011: £309.3 million) and the operating margin improved further to 40.6% (2011: 39.5%). Underlying earnings per share increased by 21% to 22.6p (2011: 18.7p).
Operating cashflow was strong, and this enabled us to grow the net cash position to £266.4 million (2011: £127.5 million) at the year end. We will use £80 million of this cash to pay the proposed final dividend, but will achieve our aim of meeting the regulatory capital requirements, without reliance on the consolidation waiver, by the end of 2012. The capital position has been strengthened further since the year end, with the holders of £65 million of convertible bonds having elected to convert their holdings to ordinary shares.
Our equity teams again delivered consistent outperformance against their respective benchmarks over both the longer and shorter term and, in due course, once sentiment towards the Eurozone improves, we believe that our pan-European equities team will attract interest from investors. Fixed income performance remains generally above benchmark over five years, although a few strategies underperformed over one year as the teams believe government bonds remain overvalued and so favoured a short duration stance.
Within solutions, performance was good in fund of hedge funds (FoHF) although it was a mixed year for new business with outflows from the multi manager capability, which continues its transition following the acquisition of the RBS business. Nevertheless, we continue to widen the appeal to our existing investor and consultant base.
Our main focus is on markets with the largest asset pools, particularly the Americas and Europe, and Aberdeen’s marketing and sponsorship programmes continue to gain traction in these key geographies. As well as our continued sponsorship of Cowes Week, Aberdeen was also the main sponsor of this year’s Scottish Open golf tournament, as part of a three year agreement.
Earlier in the year, the Group won a number of awards. UK wins included the Investment Week Fund Manager Group of the Year as well as Investment Trust Group of the Year from both What Investment and Money Observer. Around Europe (Belgium, Finland, Italy, Norway) we were named best Speciality Equity House, while in France we received an award for Best Equity Manager. Finally, our EMD, multi asset, FoHF capabilities were also recognised at various award ceremonies. Most recently, Aberdeen was named Best Overall Group at the 11th Annual European FoHF Awards.
During the year, I was pleased to welcome to the Board a new independent non-executive director, Richard Mully, and shortly after the year-end, Rod MacRae, our Global Head of Risk, joined as an executive director. Gerhard Fusenig resigned from the Board in March following Credit Suisse’s sale of its shareholding, and I would like to record the thanks of the entire Board for his considerable contribution over the last three years.
Giles Weaver will retire from the Board at the conclusion of the Annual General Meeting in January, following twelve years’ service. I would like to place on record the thanks of all of his colleagues for his valuable contribution and commitment throughout that period. I would expect to announce the appointment of a further independent non-executive director, as part of the ongoing refreshment of the Board, in due course.
Europe, Middle East & Africa The British Isles accounts for 30% of our clients by AuM, some £54.7 billion. Our headquarters are in Aberdeen, where we locate many Group functions. Our largest office is in London and it is the investment centre for GEM, UK and European equities, fixed income and fund of alternatives teams. Edinburgh is the investment centre for our global equity team and the multi asset team.
Asia Pacific Singapore is the Asian headquarters of the Group and is home to most of our Asian fund managers covering the main asset classes as well as substantial marketing, client servicing and administrative functions. We celebrated the twentieth anniversary of the Singapore office in 2012, reflecting our long and successful track record in the region.
We manage almost 17% of our AuM on behalf of clients throughout the Americas and have developed a strong platform on which to service institutional and wholesale channels.
In the absence of clear economic direction, asset prices have fluctuated. After a steep plunge at the end of 2011, equities staged an improbable recovery through the early months of 2012. Since June they have resumed choppy progress. Markets have prematurely cheered solutions to the European debt crisis several times; yet the Continent’s underlying fiscal position continues to deteriorate. This is starting to affect corporate profits worldwide.
Products and performance We have done well because of our focus on identifying high quality companies rather than being diverted by macroeconomic issues. This has been reflected in good equity performance in areas of traditional strength – emerging markets, Asian and global equities, plus emerging market debt (EMD).
At the same time, objective-based products, including those that target particular levels of return or risk, have multiplied. High correlation across asset classes – as well as volatility – has proven tough for more complex strategies. In aggregate, hedge funds have not performed.
Distribution If fund flows have become concentrated, the same might increasingly be said of distribution. The top distributors in Europe and Asia appear to be tightening their grip.
Tighter regulation Regulators nearly everywhere have been looking to increase consumer protection, prevent a repeat of mis-selling and to ensure that fund managers are better run.
Market performance Net flows Net flows as % of BoY AuM Source: McKinsey Global Asset Management database
After consulting with a wide range of distributors to ensure that we meet the requirements of our clients, we have launched our series of RDR ready share classes.
Europe has a more bank-led distribution culture than Britain. Advice is the exception and costs are heavily bundled. Choice (and its corollary, consumer education) has not been an overriding concern. Neither an RDR regime nor one where customers are evaluated for their financial sophistication, the two poles of current debate, seems ideal. The next phase of MiFID, the European directive on the selling of financial instruments, will need to find common ground.
We believe that multi asset ‘solutions’ as an umbrella idea has merit. Many investors today are as focused on the management of risk as the generation of positive returns. For them, the conventional way of looking at asset allocation, i.e. from an asset class return perspective may not work.
Any solutions proposal is, of necessity, very client specific and resource intensive. It must start with a definition of risk from the client's perspective a subject which can divide even sophisticated investors. Therefore, while solutions are an exciting departure for us (given our steadfast equity style), it is a calibrated one.
Aberdeen Asset Management commenced a three year sponsorship deal in 2012 for the Scottish Open to support brand growth in UK, Europe and the US.
Our sole focus is the active management of our customers' portfolios, with 94% of our net revenue coming from recurring management fees.
Our teams of investment professionals are based in the regions in which the assets under management are invested. A diversified product range, geographic reach and client base, along with our scale and focused approach, enables us to provide effective asset management and superior client service.
Our global network of 31 offices in 24 countries supports a uniformly high standard of local client service.
United Kingdom 30% Europe ex UK 33% Middle East & Africa 8% Americas 17% Asia 12%
Read more on our global presence and regional teams on pages 25 and 26.
We have a diverse client base - both by channel and nature of client. Our institutional clients include pension funds, corporates, sovereign wealth funds, government agencies and insurance companies. We typically sell to retail clients through intermediaries, also known as distributors or third party advisors, such as private banks, financial advisors, wealth managers and platforms. We also call this the wholesale channel.
£187.2bn Net revenue £869.2m Underlying profit before tax £347.8m Operating margin
Revenues from net flows in 2012 £70m (Read more on our KPIs on pages 20 and 21)
– Focus on growing our business where we have strong capabilities.
– Enhance our reputation and capability for global emerging market products across all strategies.
– Develop our capability to combine our investment skills into providing more holistic, strategic advice.
Our investment process is founded on our own primary research and due diligence processes. This is implemented through a comprehensive and robust investment screening procedure which is applied consistently by our teams.
Our strong team culture, with distinctive and transparent investment processes, sets us apart.
– Ensure that product development is driven by market and client demand and that it focuses on products where our capabilities allow for optimised returns.
– Increase profile and preference through appropriate marketing spend in our priority markets to support revenue growth.
– Continue to invest in a robust and scalable global operating model.
Distribution – Loss of clients due to misrepresentation or poor management of relationships
Brand – Reputation risk if the brand is inconsistent with the culture, products and capabilities.
Strategic highlights in the year Investment process Continued strong investment performance.
Distribution Increasing blended average management fee rate due to flows into higher margin investment products.
Ongoing Dad vail regatta sponsorship in the US reinforced our local footprint in Philadelphia.
Operating model Growth has been managed in a cost effective manner.
• Team approach, with asset managers based in the regions where we invest
• Low portfolio turnover, buying stocks and holding them for the long-term
Aberdeen’s mainstream equity process dates from the early 1990s and we believe its advantage lies in the consistency of its approach, irrespective of market conditions.
From the company visits and analysis carried out regionally, through to portfolio construction decisions, we adopt a team approach.
Proprietary research Our mainstream equity managers always visit companies before investing, making thousands of visits annually to existing and prospective holdings. Every contact is documented in detail. If a security fails our screening, we will not own it, irrespective of its index weight.
Team approach We employ over 130 equity investment professionals globally. Portfolio decisions are made collectively, and we avoid cultivating ‘star’ fund managers. Cross-coverage of securities also increases objectivity and lessens reliance on individuals.
• Asset allocation • Duration • Curve • FX • Security selection • Global IR overlay
We believe outperformance should be generated within a risk framework, adding value through multiple sources with low correlations to create natural diversification. As such, our fixed income structure comprises independent product teams, with their investment universes being as unconstrained as possible.
Our global product team is responsible for capturing these investment ideas into specific client portfolios, working within individual client portfolio guidelines. Team members are in continual discussion with the alpha teams to ensure that the best decisions of these teams are implemented across all mandates.
Active management We aim to add value by exploiting market inefficiencies in interest rates, currency, investment grade credit, emerging market debt, high yield, convertibles and money markets. We have dedicated portfolio managers and analysts in the three main time zones – Asia Pacific, Europe and the US. They operate as close-knit teams within a global framework, with investment decision-making devolved to specialists, based on their knowledge and expertise.
Flexible and disciplined investment process Our investment structure enables us not only to follow a disciplined investment process but also to be flexible to manage portfolios for a wide variety of client requirements. This may range from strategies which employ multiple sources of uncorrelated returns to those that are focused on a particular specialist area.
Analysis and feedback Maximising returns within the risk budget 1 Allocation 2 Selection 3 Management 4 Performance review
• Team approach, with managers based in the regions where we invest
In addition to funds holding direct property, we have pioneered the development of funds of property funds, with exposure to UK, Continental Europe, Asia Pacific and North America. This team invests in third party funds, not in direct property and its clients are exclusively institutional investors. Their philosophy focuses on creating alpha and not on general market exposure. Our direct investment and multi manager teams manage client money in segregated mandates as well as pooled vehicles.
Active management Our understanding of the factors that drive returns stems from our local presence and our dedicated research capability. A unique feature of property is the value that can be added by active asset management, and selecting assets with this potential enables a skillful investment manager to create alpha and outperform the market.
Delivering risk-adjusted returns We aim to help our institutional clients achieve well diversified property exposure by delivering superior risk-adjusted returns through funds that offer a clear choice of geographic or sectoral exposure. With our advanced portfolio modelling techniques, we provide an understanding of the risk of different property investments and their place in multi asset portfolios.
Long-only multi manager 33% Indexed equities 28% Multi asset 24% Funds of hedge funds 12% Funds of private equity 3%
• Bottom-up and proprietary research is the cornerstone of our investment process
• Team-based approach with managers based in London, Edinburgh, Paris, Singapore and Philadelphia, with access to all of the Group’s skill sets worldwide
Our fund of hedge funds, fund of private equity funds and multi manager capabilities enhance and complement Aberdeen’s traditional skills in multi asset investing. Our aim is to provide client portfolios and funds that diversify and control risk while optimising returns, whether using in-house capabilities or those of third party managers. A range of passive fund solutions is also available, according to client needs.
Active management Our multi asset team builds portfolios by investing in securities that have been researched and selected by our specialist asset class teams in-house, while our multi manager and fund of hedge fund teams research and invest in highly-skilled third party managed funds.
A focus on long-term investing In multi manager funds, we aim to add value by identifying and building strong relationships with those managers which we believe will excel at providing risk-adjusted performance. This approach mirrors our mainstream equity investment process, which is based on regular company visits with management. In multi asset portfolios and the ‘balanced’ element of multi manager products, we also employ top-down processes to aid superior portfolio construction and reduce risk.
We are committed to recruiting and retaining talented and motivated individuals who put clients at the heart of our business. We have a flat management structure and a culture of close knit teams, built up from a combination of experienced professionals and more recent recruits. This not only benefits our clients but also our employees, helping to develop long-term and personal relationships. Recruitment and selection Our strategy is to recruit from the bottom up, placing an emphasis on succession planning and developing our future leaders. We operate a summer internship programme which, for many, provides a stepping stone to a permanent career at Aberdeen. Our internships provide a unique insight into our Group, our people and our culture and is the basis for our graduate recruitment.
Learning, development & talent management By providing learning and development opportunities, on-thejob coaching and mentoring, we aim to ensure that everyone who works within Aberdeen has the resources they need to learn and build their own career.
For individuals in some areas of the business, professional training is necessary to ensure that they are proficient in the skills required for their jobs. Those wishing to pursue a career in fund management are required to complete relevant regulatory examinations. There are opportunities for others to complete industry qualifications.
Details of the Group's equal opportunities policy is available on the website and this policy is supplemented by specific policies that reflect local employment legislation and expectations.
• Shows the growth of the business through an increasing asset base and/ or product margins.
• Performance fees increased from £36.3 million to £47.5 million, yet remain at only 5% of revenue.
• Operating margin is underlying operating profit as a percentage of net revenue.
• Core operating cash flows were £419.8 million (2011: £399.3 million).
• Cash used to strengthen balance sheet, pay an increased dividend to ordinary shareholders and purchase shares to neutralise potential EPS dilution from deferred share awards.
KPIs are discussed on the basis of presentation of financial results adopted for management purposes which we define as the underlying results. On page 27 of the financial review, we discuss the distinction between underlying results and IFRS results.
• AuM grew by 10% from £169.9 billion at September 2011 to £187.2 billion at September 2012.
• Fee margins vary according to the nature of the product or service provided.
• Average fee margins increased from 41.2bps in 2011 to 45.1bps in 2012.
• Although net flows were neutral, the annualised revenue effect was +£70 million due to quality of net new business flows.
• Net new business flat, but adds £70 million of new annualised revenue
The quality of net new business flows is the key driver of the growth in revenues and profits. Above all, the strong flows from our equities products that have been key to our strong financial performance.
Our balance sheet and cash position are significantly stronger. We were close to achieving our regulatory capital target by the year end but can affirm our earlier statements that we will be able to eliminate reliance on the consolidation waiver by 31 December 2012.
Gross new business inflows for the period were £36.0 billion (2011: £43.0 billion). Outflows were £36.0 billion (2011: £44.7 billion), resulting in neutral net flows (2011: net outflow £1.7 billion).
£16.5 billion of AuM growth is from markets, foreign exchange movements and performance. Our investment performance remains good and our investment philosophy and disciplined process have continued to deliver through variable market conditions.
Notwithstanding the successful growth of EMD, the scale of losses in fixed income and solutions is disappointing, albeit there are different reasons behind the losses. We have put structure across a number of solutions products as we build the foundations for future growth and believe that we have attractive products with strong performance. We have taken steps in 2012 to improve the fixed income investment process in order to re-establish credibility in products such as global macro and credit.
There were solid inflows into existing pooled funds. We have a number of closed end funds consistently trading at a premium to their net asset value. This enabled Murray International investment trust, for example, to issue a further £100 million of new equity.
The global equity team will celebrate managing money for ten years with the same people and same process in December this year. The track record built on stability and continuity is a source of great pride to all involved.
We have taken steps over the course of the year to build a stronger fixed income business. Earlier in the year we identified our EMD, Asia Pacific macro and US credit teams as areas of excellence that could be used to help reorganise our fixed income franchise. Drawing upon the example of our strong equity business, we decided to use these areas of best practice to support the creation of a common investment process, based on strong research and risk skillsets that will support robust portfolio construction across the Group. We are also now organised to better allow our global teams to tap more effectively into the success of many of the regional fixed income teams.
Over the short term, the changes we have implemented have created some uncertainty among clients and asset consultants; however we are confident that these re-established foundations will support our business and clients well in the future.
Net new business flows for the period 10.2 (5.7) (3.2) (0.2) (1.1) –
Property The past year has seen more investors developing a global approach to their property investment activities. The repercussions of the financial crisis mean that they are typically risk averse, focusing on prime assets with strong, secure income streams, in western Europe, North America and the most advanced markets in the Asia Pacific region.
Work has been done to streamline Aberdeen’s international property fund range, with some products merged or closed to new investors, and terms reviewed to ensure they are competitive and aligned with current best practice. The phased liquidation process for the German open ended funds inherited from DEGI is proceeding according to plan, with asset sales across Europe and in Canada.
The opportunity has been taken to roll out improvements to the investment process across the property business, with a strengthened focus on risk budgeting. Europe, Germany and the Nordic region have proved more resilient than most, and this was reflected in the successful launch of new residential property funds for institutional investors in both Sweden and Germany. In Norway, investors have voted to extend the life of the €800 million Norway I property fund. New segregated mandates include construction of a €150 million pan-European direct property, and a European multi manager account for a US institutional investor.
Aberdeen solutions We have spent much of the period putting structure in place in respect of products and staff to enable us to present coherent and competitive products.
In terms of fund flows some £3.2 billion exited, leaving total AuM of £23.6 billion. The outflows reflect the continued transition following the acquisition of the multi manager and fund of alternatives teams from Coutts. In revenue terms, some of these declines were cushioned by performance fees from the flagship capital return fund.
Fund of hedge fund performance has held up well, while longterm relative performance in long only multi manager assets is also sound. Aberdeen was named as the 'Best Overall Group' at the 2012 European Fund of Hedge Fund Awards reflecting our past performance and our efforts to broaden our capability. We have updated a number of fund structures to make them more attractive for institutional investors.
It was a very busy year for our multi asset team. At the beginning of the reporting period we launched the Aberdeen Diversified Growth Fund, specifically aimed at UK defined contribution pension schemes. This fund seeks to differentiate itself from other products in the market by emphasising investment in the developing world, an area where we believe we have a world class franchise. These types of vehicles aim to smooth the volatility of returns whilst still achieving reasonable growth in capital, and are increasingly being used by pension schemes as part of the default option for members. With the advent of auto-enrolment in the UK, fund flows into these products are expected to gather pace.
The regional review covers the progress and trends for our distribution teams in our main markets. It is of prime importance to us that all of our teams deliver to the highest client service standards and that we maintain and grow a product range that meets client needs and market demand.
£6.3 billion of net flows were into higher margin pooled funds, with £6.3 billion of net flows out of segregated mandates. There has been net flows in pooled funds for each of the last five years. The AuM for our flagship Aberdeen global fund range, which is distributed globally, has increased from £27.3 billion to £34.9 billion.
EMEA EMEA continues to be our largest region for winning new business. We won almost £22 billion of gross new business (2011: £27 billion).
We have capitalised on our local presence across the region and diversified offerings, further strengthened by additional resource and new fund launches. Towards the end of the year, we launched the dynamic multi asset fund, aimed at demand from our Benelux clients and an emerging market debt fund of funds. We have seen very strong initial interest in both.
We raised total commitments of US$460 million from EMEA clients for the Asia III property fund of funds. Also, on the direct property front, we have successfully launched new residential funds in Germany and Sweden.
Distribution trends in Australia, the region's other most selfcontained market, was the mirror opposite: our institutional business faced withdrawals as the superannuation industry seeks to restructure under bigger groups and bring mandates in house (an A$230 million account from a specialist multi manager was a coup) whereas retail flows, at more attractive margins, were positive.
In the United States the wholesale distribution team now has a local presence in each of the largest metropolitan centres across the country. We opened a New York office in October to support various distribution functions as well as to serve as a flagship location for client activity and business growth. The addition of an emerging market debt analyst in Brazil underscores Aberdeen’s commitment to the region, both for investment research and, looking forward, as a growing market for distribution.
Net revenue £869.2m £784.0m +11% Underlying operating profit £352.7m £309.3m +14% Underlying profit before tax £347.8m £301.9m +15% Statutory profit before tax £269.7m £224.1m +20% Post-tax return on average equity 22.5% 20.0% +2.5%
The Board considers that the Group’s results are most meaningfully considered on a basis which excludes the effects of amortisation and impairment of intangible assets because this shows the revenues and costs which drive the Group’s recurring cashflow. We refer to this as the underlying results and the Group income statement on page 73 has been presented in a manner which enables this distinction. The Board’s monitoring of the Group’s performance and its key performance indicators, as set out on pages 20 and 21, are founded on the underlying results. As in previous years, this financial review focuses on the underlying figures.
Operating margin is calculated as operating profit (before amortisation and impairment of intangibles) as a percentage of net revenue. We calculate post tax return on average equity by dividing statutory profit before tax by the average of opening and closing net assets.
Results Net revenue for the year increased by 11% to £869.2 million, while operating expenses grew by 9% to £516.5 million. After net finance costs of £5.1 million, underlying profit before tax of £347.8 million is 15% higher than in 2011. With strong cashflow generation, we have strengthened the balance sheet and closing net cash is £266.4 million - 109% higher than last year.
The average management fee margin for the year was 45.1bps (2011: 41.2bps), as summarised in the following table: 2012 bps 2011 bps
Performance fee income added a further 3.0bps (2011: 2.5bps), so that the overall revenue margin for the year increased to 48.1bps (2011: 43.7bps).
Operating expenses have grown by £41.8 million (9%). Staff costs increased by 10%, with non-staff costs growing by 7%.
Tax The effective tax rate, defined as the tax charge divided by underlying profit before taxation, was 18.0% in 2012 (2011: 19.9%).
While the UK is the country in which we pay the highest amount of taxes - the UK corporation tax rate has reduced to 25% (2011: 27%) - the overall rate is a blend of the rates which apply in all of the jurisdictions in which we operate. The effective rate benefits from the fact that a significant element of the Group’s profit is earned in Asia where tax rates generally are lower than the UK corporation tax rate.
Earnings per share As discussed above, the Board believes that the most appropriate measure of the Group’s profitability is the underlying diluted EPS number, which excludes from its calculation the amortisation and impairment charges on intangible assets. On this measure the Group’s underlying diluted EPS has increased by 21% to 22.6p per share.
Dividends The Group has used the cash generated from the business to pay a progressive dividend.
The core operating cash flow excludes the effect of short term timing differences on settlement of open end fund transactions (which are generally settled within four working days) and any acquisition related expenses, including deferred consideration.
The Group currently operates under a waiver from the consolidated supervision rules of the Capital Requirements Directive. The waiver was granted by the FSA with effect from January 2007 and continues until August 2014. However, we expect to have sufficient capital headroom to eliminate reliance on the waiver by the end of 2012.
Short term timing differences on open end fund settlements (5.3) 7.9
Cash flow from operating activities after interest and tax 368.8 373.7
The Board recognises the importance of a robust and intelligent risk management framework to safeguard Group and client assets, protect the interests of all stakeholders and meet its responsibilities as a UK listed company and parent company of a number of regulated subsidiaries.
• Our risk management tool, which is used to capture risk and control assessments performed by each department head, as well as track events that give rise to loss or potential loss. This creates important management information.
• Risk appetite which is set by the Board to determine the size and type of risks that the Group is prepared to accept in delivering its strategic objectives. There are also a series of metrics that are reviewed by the Board risk committee to identify whether the risk being taken exceeds their appetite.
• Both the Board and executive management review emerging risks from time to time to check that all major risks have been identified.
The output from the activities in the risk management framework forms the basis for identifying key risks below.
We make investment decisions based on the long-term, which may occasionally lead to periods of underperformance. We mitigate this by ensuring clients and investment consultants fully understand our investment philosophy and by openly discussing performance drivers, supported by relevant analysis of the performance components.
There is a market risk team, independent of the fund managers, which monitors the investment profile across all asset classes.
We also forecast financial results using different scenarios to stress test the impact of major market falls on our capital base.
These are also over overarching controls in various committees (eg derivatives, investor protection), as well as an independent review of portfolio data by market risk.
There is a strong development programme for the fund managers and we seek to encourage performance and loyalty through appropriate remuneration and our extensive benefits package, which includes a significant deferred element.
This incorporates the risk that we mislead or misrepresent products to clients – this could create regulatory censure as well as loss of clients.
From 2013, the Retail Distribution Review will impact the distribution of both retail investment products and corporate pensions in the UK, affecting the shape of the intermediary market and distribution models. We have consulted with a wide range of distributors to ensure that we are well placed to meet the needs of clients.
Business continuity We have an obligation to ensure that the business can operate at all times.
There is offsite back up for our systems in place to cover each of the Group's principal operating sites and regularly test our back up plans. These tests also cover potential availability of key staff.
We use a small number of strategic suppliers. This ensures a degree of competition, whilst ensuring that we have significant influence and leverage. However, it also exposes us to concentration risk and dependence on strategic providers. We have contingency plans reviewed by the Board on how we would best manage a withdrawal or failure of a strategic supplier.
We regularly review the business recovery infrastructure and strategy of these suppliers. This includes visits by our senior executives to strategic suppliers during the year.
During the year we performed a review of our brand - to ensure it is aligned to our culture.
The Group aims to ensure that it will always have sufficient liquidity to meet its liabilities when due under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.
The Group's cash position, available facilities and forecast cash flows are monitored by the Group's treasury function.
The headroom between available facilities and amounts drawn is substantial and will be maintained at a healthy level in the future, using committed borrowing facilities where necessary to supplement cash resources retained by the Group. We prepare long-term forecasts and use stress tests to assess the Group's future liquidity, as well as capital structure and compliance with regulatory capital.
The cash and funding position of each subsidiary is monitored and each entity has access to appropriate liquidity.
We monitor the value of deposits with our counterparties against limits in our treasury policy.
Where appropriate, we extend our assessment of counterparty risk to include major suppliers.
The Group's results are reported in sterling. Due to the geographically diverse locations in which Aberdeen operates, business is conducted in a number of currencies. These include the US dollar, Singapore dollar and Euro.
The Board reviews the currency profile of the Group, including cash flows and balance sheet.
The treasury function prepares sensitivity analysis of the effect of changes in rates. Further details on sensitivity to changes in currencies are set out in note 30 of the financial statements.
The corporate governance section outlines our approach to governance, including: • The composition of the Board, its committees and the executive Group management board (GMB)
We have continued to refresh the membership of the Board. Richard Mully joined as an Independent Non-Executive Director and Rod MacRae, our Head of Risk, joined the Board from the beginning of October as an Executive Director. After Giles Weaver retires from the Board in January, we will have six NonExecutive Directors.
Risk management The Board believes that it is critical that the culture of risk management is set from the top.
We launched Aberdeen’s corporate governance principles during the year and these can be found on our website www.aberdeen-asset.com/aam.nsf/aboutus/ governancestewardship. These principles provide a framework for investment analysis, shareholder engagement and proxy voting for companies worldwide.
• Approval of the Group's strategy, goals, objectives, budgets and other plans
• Agree, in discussion with the risk committee, the Group's risk appetite, taking into consideration the Group's strategy
• To act in accordance with the matters reserved for the Board
• Take decisions on the day to day management of the Group except where matters are reserved for decision by the Board
Risk committee • Support the Board in its consideration of the business activities that expose the business to current and future material risks.
• Advise the Board on the considerations and process for setting the risk appetite.
• Ensure that senior management has in place procedures and mechanisms to identify and control all fundamental operational, financial, reputational, and regulatory risks within the Group.
Remuneration committee • Determine the remuneration packages for the Chairman, all executive directors and the senior employees.
• Review any performance- related pay schemes operated by the Group.
• Review all share incentive plans for approval by the Board and shareholders.
Audit committee • Monitor the integrity of annual, interim and preliminary financial statements of the Group.
Board governance structure The Board has set up four committees, which are populated by non-executive directors. The responsibilities of the committees continue to grow in scope and complexity in response to increasing regulatory requirements. A full description of their responsibilities is provided on the Group’s website at http:// www.aberdeen-asset.com/aam.nsf/InvestorRelations/ termsofreference
Group management board The operational management of the Group is delegated by the Board to the GMB which comprises the executive directors and other heads of department. The GMB meets three times each month, has specific terms of reference which have been approved by the Board, and has responsibility for implementing the Board’s strategy.
Background and experience Before coming to Aberdeen, Roger was with Perpetual PLC for over 20 years where, latterly, he served as deputy chairman. Roger has over 30 years’ experience of marketing and distribution in financial services and is currently a trustee of the River and Rowing Museum.
Background and experience Anita has been a plc director for fourteen years and a plural non-executive director of industrial and financial companies for eleven years. Anita is currently chair of the responsible business committee of Lloyds Banking Group and a member of its audit and risk committees. Prior to this, she was a non-executive director of Northumbrian Water, executive director at Abbott Mead vickers PLC, director of corporate development at WPP Group plc, and held various investment and marketing roles at Scottish Provident and Royal Bank of Scotland in her early career.
Background and experience Andrew joined the Group in 1986 with responsibility for private equity investment. Andrew was subsequently appointed Chief Operating Officer. Prior to joining Aberdeen, Andrew practiced commercial law and was a private equity fund manager in Edinburgh.
He graduated from the University of Aberdeen with an MA in Politics and International Relations, and an LLB. Andrew serves on the board of the Investment Managers Association and is also a director of a number of Group subsidiary companies.
Background and experience Kenichi is a CFA Charterholder and joined Aberdeen through the business and capital alliance with Mitsubishi UFJ Trust and Banking Corporation. He has fulfilled various roles within the bank, including proprietary investment as well as corporate strategic planning, and is currently executive officer and general manager in charge of the global asset management business division. Kenichi graduated with a degree in Economics from Sophia University.
Date of appointment Kenichi was appointed to the Board on 26 November 2009.
Background and experience Richard was formerly the co-founder and managing partner of Grove International Partners LLP, a major real estate private equity firm. He spent much of his 30 year career in financial services as an investment banker. Richard graduated with first class honours in Economics from University College London and also holds an MBA in Finance.
Background and experience Bill joined the Group in 1985 as Company Secretary and subsequently became Group Financial Controller. Prior to joining the Group, Bill trained as a chartered accountant with Ernst & Whinney in Aberdeen, qualifying in 1982. Bill is a director of a number of Group subsidiary companies.
Date of appointment Bill was appointed to the Board on 31 January 1991.
(chairman) • AON UK Limited (non-executive director) • Hermes Fund Managers Limited (non-executive director) • Pacific Investments (non-executive director) • RBC Europe Limited (deputy chairman) • Clydesdale Bank plc (chairman of audit committee and non-executive director)
Background and experience In addition to her role as Chief Investment Officer, Anne is Head of Aberdeen Solutions, and the EMEA region. Prior to Aberdeen, she worked for Merrill Lynch and Edinburgh Fund Managers, where she was chief investment officer and joint managing director. Anne graduated with first class honours in Electronics and Electrical Engineering from the University of Edinburgh, and has an MBA from Insead. Anne is also a director of a number of funds of hedge funds and funds of private equity funds, all managed by the Aberdeen Group. Date of appointment Anne was appointed to the Board on 22 March 2011.
Other appointments • The Council of the Duchy of Lancaster (trustee) • The Scottish Chamber Orchestra (trustee) • EveryChild (trustee) • The Court of the University of Edinburgh (lay member) • esure Group Holdings Limited (non-executive director)
Date of appointment Simon was appointed to the Board on 29 July 2009 and is Chairman of the remuneration committee.
Other appointments • Fauchier Partners (non-executive director) • Redburn Partners Holding Company Limited (nonexecutive director)
Background and experience Hugh is currently Global Head of Equities and Managing Director of Aberdeen Asset Management Asia Limited. He founded Singapore based Aberdeen Asia in 1992 and has been managing the Group's Asian equities since 1985. Hugh graduated with a BA in Politics from Exeter University. Hugh is a director of a number of Group subsidiary companies. Hugh is also a director of a number of Aberdeen-managed investment trusts and funds' boards.
Background and experience Giles is a chartered accountant and was formerly the managing director and chairman of Murray Johnstone Group until its acquisition by Aberdeen in 2000.
1 Member of the audit committee. 2 Member of the nominations committee. 3 Member of the remuneration committee. 4 Member of the risk committee.
John Brett Global Head of Distribution John joined Aberdeen on 1 November 2011 as Global Head of Distribution. He joined from Scottish Widows Investment Partnership where latterly he was head of distribution. John trained as a lawyer and was previously with Aberdeen until 2003 as Head of Legal. John is a qualified lawyer, having graduated LLB from the University of Aberdeen.
Brad Crombie Global Co-Head of Fixed Income Brad re-joined Aberdeen in 2012 after starting in the Group's graduate trainee programme twelve years ago. In the interim, he worked at Bank of America Merrill Lynch as a managing director, running the bank's non-financial corporate and high yield credit research team for the EMEA region. In addition to his fixed income leadership role, Brad is also the Global Head of High Yield. He graduated from McGill University with BA and MA degrees and read history at the University of Cambridge.
Ken Fry Chief Operating Officer Ken graduated from the University of Essex with a BA in Computer Science and joined Aberdeen with the acquisition of Frederick’s Place Holdings in 1989 as Group IT Manager. He was appointed to the GMB in 2006 as Chief Technology Officer and to his current role in 2008.
Gary Marshall Head of Americas Gary was appointed Head of the Americas in January 2010. He is Chief Executive of Aberdeen Asset Management Inc in the US and president of Aberdeen's US mutual fund range, Aberdeen Funds. Gary joined Aberdeen via the acquisition of Prolific Financial Management in 1997 and has had experience in many aspects of Aberdeen's operations, having been based in London and Edinburgh prior to moving to the US. He graduated with a BSc (Hons) in Actuarial Mathematics and Statistics from Heriot Watt University in Edinburgh and is a qualified actuary.
In this section 41 UK Corporate Governance Code 41 Board composition 41 Board effectiveness 42 Relationships with shareholders 42 Board evaluation 43 Board training 43 Risk management 44 Board committees
Independence In considering director independence, the Board has taken into consideration the guidance provided by the Code. Of the non-executive directors, Kenichi Miyanaga has been appointed by a significant shareholder, Mitsubishi UFJ Trust and Banking Corporation, and he is therefore not considered to be independent. The Board, having given thorough consideration to the matter, considers the other six non-executive directors to be independent, notwithstanding the fact that Giles Weaver has served on the Board for twelve years. Taking into consideration his independence of character and judgement, his asset management background and other relevant external experience, the Board reiterates its view that Giles remains an independent non-executive director. Giles will retire from the Board at the conclusion of the 2013 Annual General Meeting.
Board changes The Board has given careful consideration to its structure and its balance and is continuing to refresh Board and committee membership in an orderly manner. Richard Mully joined the Board as an independent non-executive director on 23 April 2012 and Rod MacRae was appointed as an executive director on 1 October 2012. Gerhard Fusenig resigned from his position as a non-executive director on 7 March 2012 and, as mentioned above, Giles Weaver will retire from the Board at the conclusion of the 2013 Annual General Meeting. A consequence of this series of changes is that, for a short period during the year, we did not comply with the Code requirements on the number of independent directors. The Board remains of the opinion that its size and composition should reflect the needs of the business and seeks to achieve this in compliance with the Code.
In addition to its formal business, the Board received a number of briefings and presentations from senior executives, local management and external advisers covering a wide range of topics relevant to the Group's business. The Board continued with its policy of making periodic visits to the Group's key overseas offices in order to meet local management and clients and to obtain an understanding of the local business environment. The Board visited the Singapore, Philadelphia and Paris offices during the year and directors also visited other overseas offices on an individual basis to meet with local management and staff. On each of these overseas visits, the Board has received presentations from local management on local and regional business conditions and "at desk" presentations from the local business teams. Whilst in Singapore, several members of the Board took advantage of the location to visit either the Hong Kong, Tokyo or Sydney offices in order to meet with local staff and clients.
Details of the individual directors' attendance at Board meetings are shown in the table below: Maximum possible attendance Meetings attended
Relationships with shareholders The Group places great importance on communication with investors and aims to keep shareholders informed by means of regular communication with institutional shareholders, analysts and the financial press throughout the year. Annual and interim reports and interim management statements are widely distributed to other parties who may have an interest in the Group’s performance and these documents, together with copies of investor presentations, are also made available on the website. The Chief Executive and Finance Director make regular reports to the Board on investor relations and on specific discussions with major shareholders and the Board receives copies of all research published on the Group. Investors are encouraged to attend the Annual General Meeting at which they have an opportunity to ask questions.
The non-executive directors also met without the Chairman present to discuss the results of the evaluation of the Chairman’s performance, having taken into consideration the views of the executive directors, and the results of this meeting were subsequently discussed between the Senior Independent Director and the Chairman. Additionally, the Chairman and the non-executive directors held a meeting without the executive directors present at which the executive directors' performance was discussed.
The Company Secretary, under the direction of the Chairman, is responsible for facilitating this induction programme, ensuring good information flow between the Board, its committees and management, and assisting with directors’ continuing professional development needs. Directors are also advised, at the time of their appointment, of the legal and other duties and obligations arising from the role of a director of a listed company and are reminded of these duties and obligations on a regular basis. All directors are obliged to undertake a required level of continuing professional development training on an annual basis, a mixture of both structured and unstructured training.
Throughout the year, the Board continued its review of the complex risks facing the Group, with the risk committee reviewing recurring thematic risk topics. Specifically, focus continued on derivatives risk management – a topical issue facing asset managers and financial markets in general. A Eurozone risk working group was formed, and met frequently during the year, to discuss Eurozone-related issues and the anticipated fallout from a sovereign collapse. Additionally, an external consultant visited the London office in April to deliver a presentation on managing high-impact/low-probability risks. From time to time, the risk committee and executive management undertake ‘blue sky’ risk assessment exercises and the issues identified are discussed and taken forward as appropriate.
Membership of the committee comprises executive directors and senior management from all business functions. The committee meetings are also attended by the heads of the primary control oversight functions comprising the following: • The compliance team reviews the effectiveness of controls that ensure compliance with regulatory requirements in each jurisdiction in which the Group operates; • The legal team is responsible for ensuring that the Group complies with statutory requirements globally;
• The business risk department is responsible for the management and oversight of operational risk; • The market risk team covers the risk profiles within the various investment strategies as well as the credit risk associated with the counterparties with whom Aberdeen conducts its business; • The internal audit function reviews the effectiveness of all controls, either by reviewing the methods and findings of the other independent monitoring functions, or by directly auditing the controls operated by management.
The Board is ultimately responsible for the Group’s system of internal controls and the ongoing management of significant matters. Furthermore, the audit committee is responsible for ensuring appropriate internal controls are in place for the Group financial consolidation and reporting processes. These bespoke controls are monitored and maintained through the risk management framework which addresses key financial reporting risks, including risks arising from changes in the business or accounting standards. Effectiveness is assessed through quarterly self-certification and independent testing of the controls. The integrity of the Company’s external reporting is further supported by a number of processes and steps to provide the assurance over the completeness and accuracy of the content. These include internal management reviews, external verification, reviews by the audit committee and by the Board of directors.
Board committees The Board has appointed the following committees to assist in the execution of its duties. All committees operate on written terms of reference, which are reviewed annually and which are available on the Company’s website, and the Chairman of each committee reports to each meeting of the Board. Each of the committees is authorised to obtain, at the Group's expense, external legal or other professional advice to assist in the performance of its duties. Only the members of each committee are entitled to attend its meetings but others, such as senior management and external advisers, may be invited to attend, as appropriate.
Report on the committee's activities during the year During the year, the committee discharged its responsibilities, under its terms of reference, by: a) reviewing the Group’s draft 2011 financial statements and 2012 interim results statement prior to discussion and approval by the Board, and reviewing the external auditor’s reports thereon; b) reviewing the continuing appropriateness of the Group's accounting policies; c) reviewing the external auditor’s plan for the audit of the Group’s 2012 financial statements, receiving and reviewing confirmations of auditor independence and approving the terms of engagement and proposed fees for the 2012 audit; d) making recommendations to the Board for a resolution to be put to shareholders to approve the re-appointment of the external auditor; e) reviewing management’s annual report on the Group’s system of internal control and its effectiveness, reporting to the Board on the results of this review and receiving regular updates on key risks and controls; f) reviewing the compliance and internal audit departments terms of reference, their work programmes and receiving regular reports on their work during the year; g) receiving reports from the Group Head of Risk; and h) carrying out an annual performance evaluation exercise and noting the satisfactory operation of the committee.
In discharging its duties to review the effectiveness of the control environment, the committee also approved the 2011/12 Control Assurance Report produced by PWC. This report is available to clients and consultants. The report describes the key roles in relation to Aberdeen’s investment management services for equity, fixed income, multi asset portfolios; and some parts of the property portfolio.
The committee carried out a review of the effectiveness of the external audit process in the year and considered the reappointment of KPMG Audit Plc. The review covered all aspects of the global audit service including, amongst other factors, the quality of the staff, the expertise, the resources, and the independence of KPMG Audit Plc. The committee also took into consideration the levels of fees paid for the global services provided by the auditor. Consideration was also given to the likelihood of a withdrawal of the auditor from the market and, it was noted that there were no contractual obligations which would restrict the choice of alternative auditor. The committee agreed that it was appropriate to recommend to the Board that KPMG Audit Plc be reappointed as auditor for a further year and, accordingly a resolution will be put to shareholders at the 2013 Annual General Meeting recommending their reappointment.
Meetings and attendance The committee operates under formal terms of reference and held five meetings during the year, with representatives of KPMG Audit Plc in attendance at each meeting. Other regular attendees at the meetings of the committee included the Chairman of the Board, the Chief Executive, the Finance Director and the other members of the Board, the Head of Risk, the Head of Internal Audit, the Compliance Officer, the General Counsel and the Deputy Finance Director. In addition, the risk committee is scheduled to hold no less than four meetings per annum, three of which are to be held on the same days as the meetings of the audit committee, in order to facilitate appropriate interaction between the two committees. To assist in this interaction, a standing agenda item for the meetings of the audit committee is to receive an oral report from the Chairman of the risk committee, providing an update on matters relevant to the audit committee of those issues considered by the risk committee.
Composition The nominations committee is chaired by Roger Cornick and he is supported by two independent non-executive directors, Anita Frew and Simon Troughton. All members served on the committee throughout the year.
Report on the committee's activities during the year During the year, the committee; a) reviewed the proposals for rotation and re-election of directors at the Annual General Meeting; b) considered and made recommendations to the Board for the appointment of two new directors; c) reviewed the succession plans for the executive directors and the other members of the GMB; d) discussed the results of the annual performance evaluation exercise; and e) noted the satisfactory operations of the committee and reviewed its terms of reference.
In respect of the appointment of Richard Mully, the committee appointed an external search consultant, Odgers Berndtson, which has no other connection with the Group, and provided a full specification of the skill set required from a new appointee. In addition, Richard was interviewed by the members of the committee and other members of the Board and was thereafter approved by the FSA prior to being appointed.
Board diversity We are long-standing supporters of diversity in the boardroom and we are supportive of the Financial Reporting Council’s aims to encourage diversity in the boardroom and, more generally, throughout the Group. Our current Board is made up of fourteen directors of whom three (21%) are women. We remain of the opinion that appointments to the Board should be made relative to a number of different criteria, including diversity of gender, background and personal attributes, alongside the appropriate skill set, experience and expertise. We will continue to insist that long lists and short lists of possible appointments to the Board reflect that position.
Meetings and attendance The committee operates under formal terms of reference and held four meetings during the year. The Chief Executive was also a regular attendee at the meetings of the committee. There was full attendance at all meetings by the members, as shown in the table below: Maximum possible attendance Meetings attended
Composition The remuneration committee is chaired by Simon Troughton, and he is supported by two independent non-executive directors, Anita Frew and Giles Weaver. Each member of the committee served throughout the year. Richard Mully was appointed to the committee after the year end in October 2012. Sir Malcom Rifkind served on the committee up until his retirement from the Board at the conclusion of the 2012 Annual General Meeting.
Meetings and attendance The committee operates under formal terms of reference and held six meetings during the year. Details of the individual attendance of members at the meetings is shown in the table below: Maximum possible attendance Meetings attended
Responsibilities The committee has oversight of the risk management framework and, more specifically, the effectiveness of risk management, governance and compliance activity within the Group. The committee also advises the Board on considerations and processes relevant to setting the risk appetite and related tolerances. In addition, the committee has a responsibility to review the implementation of appropriate procedures to identify and control all fundamental operational, financial, reputational and regulatory risks within the Group. The committee has appointed PWC to provide independent technical support and advice and to assist in the development of the risk management framework.
The committee received a number of regular reports at each of its four meetings during the year. The Group Head of Risk, Rod MacRae, provided updates to the committee on each area of the risk division's functions, including business, investment and market risk, as well as reporting on legal and compliance issues. The committee has met informally on a number of occasions on the year under review and the members of the committee have also continued to meet independently with the executive and staff from different divisions throughtout the year. Earlier in the year the committee requested updates on the developments in the Eurozone from the newly established internal Eurozone working group, set up under the Chairmanship of the Group Head of Business Risk. The committee has continued to monitor developments in the Eurozone, through regular reporting to the committee and the holding of an informal committee meeting to discuss the matter further. The committee has also focused on cash management within the Group, receiving updates on the management of both the Group's and clients' cash balances.
The committee has also continued to receive advice from PWC, who attend meetings on a periodic basis to provide guidance on the continuing development of the committee. Representatives of PWC have also held informal meetings with the Chairman of the committee and the Group Head of Risk in order to provide further assistance and discuss relevant matters.
This year, we have worked to further align corporate responsibility with our core business strategy, engaging with stakeholders on a range of issues from our responsible investing capabilities to corporate governance public policy debates, managing our talent pipeline and developing our environmental programme. Of special note this year is the establishment of the Aberdeen Asset Management Charitable Foundation, the aim of which is to expand and formalise philanthropic efforts across our global operations.
The corporate responsibility steering committee meets every two months and is chaired by the Deputy Chief Executive, Andrew Laing, who reports to the Board on developments, risks and opportunities. Attracting and retaining talent and maintaining high quality client service and delivery remain the key risks and appropriate focus is placed on having the initiatives in place to ensure that they are managed accordingly. Further details on the material environmental, social and governance (ESG) issues faced by the Group can be found in our annual corporate responsibility report, which is available on the Group website and, for the first time, has been prepared according to the Global Reporting Initiative's Sustainability Reporting Framework.
Charity and community The Group recognises its responsibility to make a positive impact on the communities in which it operates. Alongside our employee volunteering programme, which is now in its second year, 2012 marks a milestone in the Group’s philanthropic activities with the launch of the Aberdeen Asset Management Charitable Foundation. The Foundation was established in March 2012 with two core themes identified by the Board - emerging markets and local communities, reflecting our ambition to give back to those areas which are key strategic focuses of the business and to build on the established pattern of giving to communities in which Aberdeen employees live and work.
Under the emerging markets theme and in light of the multiple issues of disadvantage that exist there, the Foundation has chosen to support a children's charity in Brazil.
Highlights this year include the certification of our UK operations to the globally recognised environmental standard ISO 14001:2004 and the expansion of the EMS to cover over 75% of the Group by headcount.
Carbon emissions from our offices Initiatives including the installation of smart meters and rolling replacement of LED lights have resulted in carbon emissions from our UK offices reducing by 8% on the prior year. Elsewhere, energy audits have been completed in our Frankfurt, Helsinki and Stockholm offices and our Sydney office continues to purchase electricity generated from renewable sources.
Waste Increasing recycling rates and reducing waste are key priorities. In the UK, all paper and cardboard are recycled and represent 70% of our total waste. Paper used in all of our offices is FSC sourced.
Carbon footprint – business travel 3,055 2,668 tonnes CO2 3.50 3.40 tonnes CO2 / FTE
I am pleased to present the remuneration report for the year to 30 September 2012.
Aberdeen has performed strongly in 2012, as more fully discussed in other sections of the annual report, with an increase of 21% in underlying diluted earnings per share and a 28% increase in the ordinary dividend. Total shareholder return for the last 5 years was 110%. Against this background, the aggregate value of bonus awards has increased by 10%, but there have been no increases in awards to executive directors.
• The committee has for many years maintained control of the aggregate level of annual bonuses by reference to the Group’s overall profitability. However, as explained later in this report, this has not previously been formally reported to shareholders and we have agreed that we should now do so more explicitly.
Membership The members of the committee, all independent non-executive directors, who served during the year are: Simon Troughton (Chairman); Anita Frew; and
Richard Mully joined the committee on 10 October 2012 to replace Giles Weaver who will retire from the Board following the forthcoming Annual General Meeting.
McLagan provided the committee and management with information on market positioning and employment market conditions in the various countries and regions in which the Group operates.
The Chairman and all members of the remuneration committee also serve on the risk committee. Their membership helps to ensure that the management of risk and any circumstances which could materially increase the Group’s exposure are fully considered by the committee when remuneration decisions are taken. Richard Mully, who has recently been appointed as Chairman of the risk committee, has also joined the remuneration committee.
• Discussing the proposed recruitment of certain key employees, and the remuneration packages for new appointments.
Remuneration policy The Group's remuneration policy is designed with the intention of achieving the following aims: • the recruitment, retention and motivation of employees of the necessary calibre to maintain and develop the Group's position in the asset management sector; • linking of the major element of reward to performance, thereby aligning the interests of directors and employees with those of shareholders and clients; • prudent management of risk, within the limits of the Group's risk appetite and the risk management framework; and
The key principles of the remuneration policy apply to executive directors, members of the GMB and other senior employees and are expected to remain unchanged for 2013 and subsequent years.
Review of incentive plans during 2011-12 The committee reviewed the incentive plans for executives, including addressing the items in the table below: Items addressed Outcomes
Annual bonus caps The committee considered whether to apply an absolute cap on the level of individual bonus awards. Having reviewed market practice, it concluded that this would place Aberdeen in an uncompetitive position relative to its peer group. However, the committee believes that its practice, which it has adopted consistently for several years, of relating the maximum level of aggregate bonus pool to the Group’s profits provides a robust control over the risk of excessive awards. The committee believes that the aggregate bonus pool in any year should normally be no more than 25% of pre-bonus operating profit. The committee also takes account of the ratio of total compensation costs to revenue, which at 34.8% for 2012 (2011: 34.9%) is competitive within Aberdeen's peer group.
The high proportion of bonus deferral (75%), the extended vesting period (4 years) for executive directors and members of the GMB, supplemented by clawback arrangements and the risk controls incorporated in Aberdeen’s team-based investment process, ensure that the uncapped bonus opportunity encourages both excellent performance and the prudent management of risk.
The committee concluded that its policy of deferring 75% of annual bonus already provides a substantial proportion of long-term remuneration. Rather than augmenting the existing package with new LTI awards, the committee has decided to: extend the period over which deferred bonuses vest to four years; formalise the clawback provision in the bonus plan; and increase the shareholding requirement for executive directors.
Fixed • To pay a fair salary commensurate with the individual’s role, responsibilities and experience, and having regard to the market rates being offered for similar roles in the asset management sector and other comparable companies.
• There were no salary increases for executive directors in January 2012 and no increases are proposed for the January 2013 review.
• Legacy defined benefit plans from corporate acquisitions are closed to all future accrual at the earliest reasonable opportunity.
• Employer contribution of up to 20% of basic salary, depending on relevant market practice in each country; rates of pension contribution within each country are consistent between executives and other employees.
• Since 2010, the Chief Executive has waived his entitlement to a pension contribution or a cash allowance in lieu of pension contribution.
Annual bonus variable • In line with practice amongst other asset management companies, individual bonuses are not subject to an absolute cap. However, the aggregate size of the bonus pool is dependent on the Group’s overall performance and profitability.
• For bonuses awarded to executive directors and members of the GMB in respect of 2012 performance, the 75% deferred component will vest in four equal tranches, over four years.
• Annual bonuses for excellent performance are not subject to an individual cap, as this would place Aberdeen at a competitive disadvantage in the market – the norm in the sector is not to cap bonuses. However, the committee sets an effective cap at an aggregate level, based on the Group’s profits.
Compliance with the FSA Remuneration Code The committee regularly reviews its remuneration policies to ensure compliance with the FSA Code principles that apply to Aberdeen. The remuneration policy is designed to be consistent with the prudent management of risk, and the sustained, longterm performance of the Group. The review of the remuneration policy in light of the Code is undertaken with the involvement from Aberdeen's Group Head of Risk; he also has an important role in keeping the committee informed of Aberdeen's risk profile so that this can be taken into account in determining variable remuneration.
Further details i) Base salary Executive directors' base salaries are unchanged since
January 2011 and will remain unchanged at the forthcoming annual review in January 2013. Thereafter, increases will be considered in relation to inflation and the level of increases considered for staff overall.
www.aberdeen-asset.com 55 ii) Annual bonus for 2012 performance The policy is to recognise corporate and individual achievements each year through an appropriate annual bonus scheme. The aggregate value of awards in any year is dependent on the Group's overall performance and profitability. Consideration is also given to the levels of bonuses paid in the market. Individual awards, which are payable to all members of staff and are non-pensionable, are determined by a rigorous assessment of achievement against defined objectives, and are reviewed and approved by the committee.
Minimum of 50% in Aberdeen shares, up to 50% in funds managed by Aberdeen
In equal tranches over four years, vesting on the 1st, 2nd , 3rd and 4th anniversaries of the award.
Conversion of underlying operating profit to core operating cash flow 119% 129% 115%
Total £000 1 The deferred component will vest in four equal tranches in December 2013, 2014, 2015 and 2016.
iii) Long-term Incentive Plan (LTIP) No awards have been made under the LTIP since December 2009. The 2008 award reached its vesting date in December 2011. Awards made in 2009 remained unvested as at 30 September 2012, and will vest in December 2012.
Shareholder dilution As at the date of this report, LTIP Conditional Ownership Awards, LTIP Incentive Options and executive share options are outstanding over the following numbers of shares: Number of Shares
vi) Pension The Group provides defined contribution pension arrangements for its employees, with contribution rates of up to 20% of basic salary, according to normal practice in the various countries in which the Group operates. In light of changes to pensions legislation introduced in the UK from 6 April 2006, and subsequent legislative changes from 6 April 2010, some of the Group's UK employees, including the UK based executive directors, have elected for employer contributions to the scheme to cease. In these cases, the committee has approved cash allowances to be paid, such that the overall cost to the Group is no greater than the pension contribution which would otherwise have been made. Any similar requests which may be made by employees in future will be treated in the same manner. No such request will arise in respect of the Group's legacy defined benefit schemes, all of which are closed to future accrual.
Clawback A clawback principle applies to the annual bonus plan. This will enable the committee to recoup annual bonus in the exceptional event of: a misstatement or misleading representation of performance; a significant failure of risk management and control; or, serious misconduct by an individual.
Total shareholder return The Regulations require the inclusion of a graph which illustrates the total shareholder return (TSR) for a holding in the Company's shares against a broad equity market index. The FTSE All-Share Index has been used as it includes all UK listed stocks, including the Company's ordinary shares. The graph below also includes as a comparator the FTSE All-Share General Financial Index. The committee considers this to be an appropriate index against which to measure performance because it includes all other UK-listed financial stocks. Both of these indices are calculated on a total return basis assuming reinvestment of dividends.
Aberdeen Asset Management FTSE All Share General Financial FTSE All Share
External directorships Executive directors are permitted to accept a limited number of directorships outside the Group, recognising that this can assist in their personal development. All such appointments are approved in advance by the Board. Where the appointment is accepted in furtherance of the Group's business, any fees received are remitted to the Company. If the appointment is not connected to the Group's business, the director is entitled to retain any fees received. The Group earned fees of £41,000 for Martin Gilbert's services as a non-executive director of two Aberdeen-managed companies and £21,000 for Hugh Young's services as a non-executive director of one Aberdeen-managed company. Martin Gilbert earned and retained fees of £246,000 for acting as chairman of FirstGroup plc and as a non-executive director of British Sky Broadcasting Group plc. Anne Richards earned and retained fees of £17,000 for being a member of the Council of the Duchy of Lancaster.
Total holding as multiple of base salary 3 1 Unconditional awards represent deferred awards which have passed their earliest vesting dates and on which the individual can require formal vesting at any time without restriction. 2 Conditional awards represent deferred awards which have not yet reached their earliest vesting dates and on which the individual cannot yet require formal vesting. 3 At the year-end 30 September 2012 share price.
Andrew Laing 30 August 1996 12 months 6 months One year’s remuneration
Bill Rattray 30 August 1996 12 months 6 months One year’s remuneration
Hugh Young 30 August 1996 12 months 6 months One year’s remuneration
Anne Richards 9 December 2004 12 months 6 months One year’s remuneration
The remuneration of non-executive directors is determined by the Board and the Chairman's remuneration is determined by the remuneration committee. The level of fees was reviewed during the year and changes were made to ensure that they remained competitive and appropriate in light of the increased time commitment necessary for a non-executive director in a financial services business to fulfil his duties.
Fees are paid to the Chairman and non-executive directors at the following annual rates: £ Previous £
Supplement for Chairman of audit, remuneration and risk committees 20,000 16,000
Supplement for member of audit, remuneration and risk committees 10,000 8,000
These interests represent ordinary shares which will vest on the dates stated
Martin Gilbert 23.1.04 413,000 – – 413,000 59p Jan 2007 Jan 2014 Achieved
Andrew Laing 11.6.03 89,000 – – 89,000 42p Jun 2006 Jun 2013 Achieved
Hugh Young 17.6.08 150,000 (150,000) 212p – 130.25p Jun 2011 Jun 2018 Achieved
The market price of the Company's ordinary shares at 30 September 2012 was 311.1p and the range during the year was 167.8p to 311.3p.
The market price of the Company’s ordinary shares at the vesting date, 6 December 2011, was 212p.
The remuneration report was approved by the Board of directors on 23 November 2012 and signed on its behalf by: Simon Troughton Non-executive director
The directors have pleasure in submitting their annual report and financial statements for the year to 30 September 2012.
An interim ordinary dividend of 4.4p per share was paid on 14 June 2012. The directors recommend a final ordinary dividend of 7.1p per share, making a total of 11.5p per share for the year to 30 September 2012.
Mitsubishi UFJ Trust & Banking Corporation 226,253,982 19.1 Legal & General Group Plc 36,486,297 3.1 MFS Investment Management 36,654,558 3.1
Share capital Details of changes in share capital are set out in note 21 of the financial statements. The authority for the Company to purchase, in the market, up to 114,464,627 of its ordinary shares, representing approximately 10% of its issued ordinary share capital, expires at the forthcoming Annual General Meeting. This authority was not required during the year; however, at the forthcoming Annual General Meeting, shareholders will be asked to renew such authority for a further year.
Employees Details of the Group's employment practices can be found in the our people section of the report on page 18.
Corporate governance A report on corporate governance and compliance with the provisions of the UK Corporate Governance Code, which forms part of this directors' report, is set out on pages 34 to 49.
Acquisition of shares by the employee benefit trust During the year, the Group Employee Benefit Trust, funded by the Company, purchased 42,553,270 ordinary shares in the Company, which have an aggregate nominal value of 10p each, for a consideration of £83.1 million. The shares were purchased in order to hedge the Group's future commitment in relation to the vesting of awards under the Group's deferred share award scheme.
Policy on payment of creditors All open end fund repurchase settlements are paid within four working days of receipt of the appropriate documentation from investors. Unless otherwise agreed, payments to other creditors are made within thirty days of receipt of an invoice. At the year end, the Group and Company had an average of 23 days’ purchase outstanding in respect of trade creditors and an average of 4 days outstanding in respect of open end fund repurchase settlements.
2013 Annual General Meeting A separate document, the Notice of Annual General Meeting 2013, covering the Annual General Meeting, of the Company to be held on 17 January 2013 at noon, will be sent or made available to all shareholders and will contain an explanation of the business before that meeting.
Company Information The Company is registered in Scotland (No. 82015) and its Registered Office is located at 10 Queen's Terrace, Aberdeen, AB10 1YG. By order of the Board
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance statement that complies with that law and those regulations.
Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/private.cfm.
Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 30 September 2012 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; • the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
Under the Listing Rules we are required to review: • the directors’ statement, set out on page 64, in relation to going concern; • the part of the Corporate Governance Statement on page 41 relating to the company’s compliance with the nine provisions of the UK Corporate Governance Code specified for our review; and
In publishing these financial statements, the Company is taking advantage of the exemption provided by section 408 of the Companies Act 2006 not to present its individual income statement and related notes that form part of the approved financial statements.
Accounting estimates and judgements Preparation of the financial statements necessitates the use of estimates, assumptions and judgements, which affect the reported values of assets, liabilities and contingent liabilities at the balance sheet date as well as affecting the reported income and expenses for the year. Although the estimates are based on management’s knowledge and judgement of information and financial data, the actual outcome may differ from these estimates. The key assumptions which affect these results for the year and the balances as at the year-end are specifically identified, where appropriate, in the following notes to the Group financial statements: a) Periods used for amortisation of intangible assets – note 12 b) Impairment testing of goodwill and intangible assets – note 12 c) Deferred tax assets – note 15 d) Provisions - note 27 e) Pensions – note 32
'Improvements to IFRS 1, IAS 1, IAS 16, IAS 32, IAS 34' 1 January 2013
Basis of consolidation The consolidated financial information contained within these financial statements incorporates the results, cash flows and financial position of the Company and its subsidiaries for the period to 30 September 2012. Subsidiaries are entities controlled by the Company and are included from the date that control commences until the date that control ceases. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period, or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognised at that date.
Revenue Revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and such revenue can be reliably measured. Revenue is recognised as services are provided and includes management fees, transaction fees and performance fees.
Initial income from the sale of shares in open end investment companies is taken to the balance sheet and amortised over the period of the asset management service, which is estimated based on the Group’s experience of the average holding periods by investors.
Finance revenue Finance revenue comprises interest and dividends. Interest income is recognised using the effective interest rate method as it accrues. Dividend income is recognised when the Group’s right to receive payment is established which, in the case of listed securities, is the ex-dividend date.
Leases All Group leases are operating leases, being leases where the lessor retains substantially all the risks and rewards of ownership of the leased asset.
The surplus or deficit in respect of defined benefit schemes is expressed as the excess or shortfall of the fair value of the assets of the scheme compared to the present value of the scheme liabilities and is recognised as an asset or liability of the Group or Company.
Interest costs on the liability, expected return on plan assets and the costs of curtailments and settlements are recognised in the income statement.
Actuarial gains and losses are recognised directly in other comprehensive income in the period in which they occur. When the calculation results in a benefit to the Group or Company, the recognised asset is limited to the present value of any future refunds from the plan or reductions in future contributions to the plan.
Other employee benefits Bonus payments These are recognised when there is a present legal or constructive obligation to make such payments as a result of past events and a reliable estimate of the obligation can be made.
Equity-settled share-based payments to employees are measured at the fair value of the equity instruments at the grant date.
Employee Benefits Trust The Group has an Employee Benefits Trust (EBT) which owns shares in the Company for the purposes of administering the Group’s LTIP and deferred share schemes. The EBT is consolidated into the Group and Company's financial statements, with any shares held by the EBT deducted from equity. Any consideration received for such shares is recognised within retained earnings. No gain or loss is recognised in the income statement on the purchase, sale, issue or cancellation of equity shares.
Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised in other comprehensive income.
Current tax is the expected tax payable on the taxable profit for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
in the financial statements and the corresponding basis used for tax purposes.
• where the deferred tax asset or liability arises from the initial recognition of an asset or liability in a transaction that: – is not a business combination; and
Property, plant & equipment Property, plant & equipment is stated at cost less accumulated depreciation and accumulated impairment losses.
Expenditure on property, plant & equipment is capitalised on initial recognition. Subsequent expenditure is only capitalised when it is probable that there will be future economic benefits attributable to the item and the cost of the item can be measured reliably. All other expenditure is recognised as an expense in the income statement as incurred.
• Property improvements: shorter of five years or the period of the lease
The carrying value of these assets is reviewed at each reporting date to consider whether there is any indication that the value of any asset may be impaired; if any such indication exists and where the carrying value exceeds the estimated recoverable amount, the asset is written down to its recoverable amount, being the greater of fair value less costs to sell and value in use. Any impairment losses are recognised in the income statement.
An item of property, plant & equipment is derecognised upon disposal or when no further economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying value of the asset) is included in the income statement in the year the asset is derecognised.
Intangible assets Goodwill Goodwill, representing the excess of the cost of acquisition over the fair value of the Group’s share of the identifiable assets, liabilities and contingent liabilities acquired, is capitalised in the balance sheet. Following initial recognition, goodwill is stated at cost less any accumulated impairment losses.
Management contracts and distribution agreements are recorded initially at fair value and then amortised, if appropriate, over their useful lives. The fair value at the date of acquisition is calculated using discounted cash flow methodology and represents the valuation of the net residual income stream arising from the management contracts or distribution agreements in place at the date of acquisition. The contracts are included in the balance sheet as an intangible asset.
The useful lives of management contracts in respect of certain open end funds, which have no limit of time or termination provisions, are considered to be indefinite and are therefore not subject to amortisation. The indefinite nature of these contracts is re-assessed on an annual basis to ensure that the policy remains appropriate. The Group tests for impairment of these assets annually, or more frequently if there is an indication that the carrying amount may not be recoverable. The recoverable amount is the greater of fair value less costs to sell and value in use. Management contracts in respect of segregated mandates and certain open end funds are considered to have a finite life and are therefore amortised on a straight line basis over their estimated average contract term of between two and ten years, with amortisation charged to the income statement. The useful lives of distribution agreements are determined by the expiry date of the agreement.
All other expenditure is expensed as incurred. At each reporting date, an assessment is made as to whether there is any indication that an asset in use may be impaired. If any such indication exists and the carrying values exceed the estimated recoverable amount, the asset is written down to its recoverable amount. The recoverable amount is the greater of the fair value less costs to sell and value in use.
Impairment The Group performs annual impairment reviews in respect of goodwill and intangible fixed assets with indefinite lives. The Group carries out impairment reviews in respect of intangible fixed assets with definite lives, property, plant & equipment and other assets, including fixed asset investments, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
An impairment loss is recognised in the income statement whenever the carrying amount of an asset or its cashgenerating unit exceeds its recoverable amount. The recoverable amount is the higher of its value in use and its fair value less costs to sell.
Impairment losses in respect of goodwill are not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
Financial instruments Financial instruments are recognised initially at fair value plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. They are categorised as described below.
Financial investments at fair value through profit or loss include investments acquired principally for the purpose of selling in the short term or if so designated by management. They are carried at fair value in the balance sheet and gains or losses are taken to the income statement in the period in which they arise. The following assets and liabilities are classified as financial instruments at fair value through profit or loss: • Current assets – Assets backing investment contract liabilities – Stock of units and shares – Seed capital – Other investments
Available for sale financial assets are also carried at fair value in the balance sheet. Movements in fair value are taken to the fair value reserve until derecognition of the asset, at which time the cumulative amount dealt with through this reserve is recognised in the income statement.
Loans and receivables and other financial liabilities are recognised at amortised cost using the effective interest rate method.
Cash and cash equivalents Cash and cash equivalents comprise cash balances, call deposits and investments in money market instruments with an original maturity of three months or less. Bank overdrafts that are repayable on demand are included as a component of cash and cash equivalents for the purposes of the statement of cash flows.
L&P is consolidated in the Group financial statements on a line-by-line basis. Unit linked policyholder assets (described as assets backing investment contract liabilities) held by L&P and related policyholder liabilities are carried at fair value, with changes in fair value taken to profit or loss.
Amounts received from and paid to investors under these contracts are treated as deposits received or paid and therefore not recorded in the income statement. Charges to investors due under these contracts are recognised in the income statement. At the balance sheet date the value of these contracts is stated at an amount equal to the fair value of the net assets held to match the contractual obligations.
Investments in subsidiaries In the Company balance sheet, investments in subsidiaries are carried at cost less any provision for impairment.
Dividends Dividends on ordinary shares are recognised on the date of payment or, if subject to approval, the date approved by shareholders.
Foreign currencies The consolidated financial statements are presented in sterling, the Company’s functional and presentation currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured in that functional currency.
The assets and liabilities of foreign operations are translated to sterling at the exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated to sterling at rates approximating to the exchange rates ruling at the dates of the transactions. Exchange differences arising are recognised in other comprehensive income and accumulated in equity. On disposal of a foreign operation, all of the accumulated foreign exchange differences in respect of that operation are recycled to the profit and loss account.
Statements of comprehensive income For the year to 30 September 2012
Tax on items of other comprehensive income (3.4) 1.6 0.2 0.7
Other comprehensive (expense) income, net of tax (8.1) 6.9 (2.4) (2.2)
Notes £m £m £m £m Assets Non-current assets Intangible assets 12 994.1 1,060.0 60.1 64.8
Total equity attributable to shareholders of the parent 1,088.4 1,020.2 1,325.7 1,261.7 Non-controlling interest 14.0 16.2 – –
Arising on the issue of shares 0.1 0.1 – – – – – – – – 0.2 Share based payment charge – – – – – – – 54.4 – – 54.4 Purchase of own shares – – – – – – – (98.1) – – (98.1) Dividends paid to shareholders – – – – – – – (86.1) – (14.2) (100.3) Non-controlling interest in consolidated funds – – – – – – – – 2.6 – 2.6
Profit for the period – – – – – – – 208.7 – 14.9 223.6 Other comprehensive (expense) income – – – – (9.2) 2.5 – (1.4) – – (8.1)
Conversion of preference shares – 0.8 – – – – (0.8) – – – – Share based payment charge – – – – – – – 53.8 – – 53.8 Purchase of own shares – – – – – – – (83.1) – – (83.1) Dividends paid to shareholders – – – – – – – (106.2) – (14.9) (121.1) Non-controlling interest in consolidated funds – – – – – – – – (2.2) – (2.2)
Profit for the period – – – – – – – 198.5 – 14.9 213.4 Other comprehensive expense – – – – – (0.8) – (1.6) – – (2.4) Total comprehensive (expense) income – – – – – (0.8) – 196.9 – 14.9 211.0 Arising on the issue of shares – 0.1 – – – – – – – – 0.1
Statements of cash flows For the year to 30 September 2012
Short-term timing differences on open end fund settlements (5.3) 7.9 – –
Net cash generated from operating activities 4 368.8 366.4 269.6 194.0
Net increase (decrease) in cash and cash equivalents 137.3 61.4 40.4 (113.7)
IFRS 8 Operating Segments requires disclosures to reflect the information which the Group management board (GMB), being the body that is the Group's chief operating decision maker, uses for evaluating performance and the allocation of resources. The Group is managed as a single asset management business, with multiple investment strategies of equities, fixed income and property, complemented by a solutions business which provides multi asset and fund of alternatives services. These strategies are managed across a range of products, distribution channels and geographic regions. Reporting provided to the GMB is on an aggregated basis.
Under IFRS 8, the Group is required to disclose by geographical location revenue and amounts of non-current assets other than financial instruments, deferred tax assets and retirement benefit assets. Revenue below is allocated by geographical location based on where the assets are managed and the location of client service teams.
(Increase) decrease in trade and other receivables (1.4) 0.9 (24.2) 16.0
(Decrease) increase in trade and other payables (4.6) 14.2 58.5 9.0
Net cash generated from operating activities 368.8 366.4 269.6 194.0 5 Employees
Net finance costs 5.1 7.7 7 Other gains and losses £m £m
Recycling of losses on available for sale assets to income statement (4.6) (1.7)
Foreign tax – current 30.0 24.2 Foreign tax – adjustments in respect of prior periods 0.5 0.3 Total current tax 52.3 46.4 Deferred tax credit Origination and reversal of temporary differences (6.8) (8.1) Adjustments in respect of prior periods 0.6 1.9 Total tax expense in income statement 46.1 40.2
A reduction in the rate from 26% to 25% (effective from 1 April 2012) was substantively enacted on 5 July 2011, and further reductions to 24% (effective from 1 April 2012) and 23% (effective from 1 April 2013) were substantively enacted on 26 March 2012 and 3 July 2012 respectively. The Budget on 23 March 2012 announced that the UK corporation tax rate will reduce further to 22% by 2014.
Factors affecting future tax charge The Group's overseas profits are subject to overseas tax rates some of which are lower than the standard rate of UK corporation tax.
All other deferred tax assets and liabilities at 30 September 2012 have also been calculated based on the rate which will be substantively enacted that is expected to apply when the asset is realised or the liability settled. Future changes in tax rates will also impact deferred tax assets and liabilities.
9 Profit for the financial year The profit dealt with in the accounts of the Company was £213.4 million (2011: £156.8 million).
Declared and paid during the year: Total dividends and coupon payments paid during the year 126.0 105.5
Proposed for approval at the Annual General Meeting (not recognised as a liability at 30 September)
The coupon payments on perpetual capital securities are tax deductible. The deduction for 2012 is £4.9 million (2011: £5.2 million), resulting in a net cost of £14.9 million (2011: £14.2 million).
www.aberdeen-asset.com 85 11 Earnings per share The calculations of earnings per share are based on the following profits and numbers of shares.
Basic earnings per share amounts are calculated by dividing profit for the year attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year.
Diluted earnings per share amounts are calculated by dividing the profit for the year attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year, plus the weighted average number of ordinary shares that would be issued on the conversion of all the potentially dilutive shares into ordinary shares.
Underlying earnings per share figures are calculated by adjusting the profit to exclude amortisation and impairment of intangible assets. The purpose of providing the underlying earnings per share is to allow readers of the accounts to clearly consider trends without the impact of these non-cash items.
Amortisation and impairment of intangible assets, net of attributable taxation 61.5 57.8
Goodwill and intangibles The Group has one cash generating unit (CGU) for the purpose of assessing the carrying value of goodwill and intangible assets reflecting the fact that the Group is managed as a single asset management business. It previously had two CGUs: (i) property asset management and (ii) investment management. However, management of the property asset class was fully integrated with the other asset classes, such that cashflows can no longer be identified independently. The carrying value of goodwill and intangible assets are as follows: Group Company £m £m £m £m
The following discount rates have been used in the impairment analysis. They are based on the Group's weighted average cost of capital using a risk free interest rate, together with a beta for the sector and allied to an equity risk premium.
The impairment review included a sensitivity analysis on the key assumptions underpinning the cash flow projections and the rate at which the projections were discounted to arrive at the final value-in-use. The sensitivity analysis included testing assumptions relating to future revenue growth and the assumptions surrounding the level of operating costs and margins.
The absolute levels, on a standalone basis, of the key assumptions which most closely resulted in a match in the values-in-use to the carrying values of goodwill were: investment management £m
The value-in-use, calculated in accordance with the process described above, was compared with the carrying values of goodwill, intangible assets and property plant and equipment. The comparison resulted in a surplus of value-in-use over the carrying value of these assets as shown in the table below, and therefore no impairment of goodwill has been recognised in the year.
Management contracts and distribution agreements The Group reviewed the management contracts and distribution agreements held at 30 September 2012 including contracts which are considered to have an indefinite life. Management contracts at 30 September 2012 include £79.3 million (2011: £99.3 million) of assets which are considered to have an indefinite life. These assets comprise contracts for the management of open end funds which have no limit of time or termination provisions. The Group also reviewed definite life assets for impairment indicators and performed impairment tests where required.
At 30 September 2012, the Company held indefinite life open end fund contracts with a value of £3.4 million (2011: £23.5 million).
Additions 18.9 Fair value gains – reserves 0.1 Fair value losses – reserves (0.6) Fair value losses – income statement (0.5) Disposals (29.4) Exchange movement (0.3)
Additions 17.9 Fair value losses – reserves (1.1) Fair value losses – income statement (3.0) Disposals (5.7) Exchange movement (1.8)
Additions in 2012 includes £15.9 million of loan capital provided to a third party which is classified as an amortised cost investment.
Additions: increase in existing subsidiary undertakings 114.1 – 114.1 other investments – 16.7 16.7
Aberdeen Unit Trust Managers Limited Unit trust management 100 England UK
www.aberdeen-asset.com 93 15 Deferred tax assets and liabilities Deferred tax assets and liabilities recognised are as follows: Group
Available for sale financial assets 2.0 – 0.7 2.7 – (1.4) 1.3
The Group has tax losses which arose in the UK of £87.5 million (2011: £87.5 million) and overseas of £118.9 million (2011: £115.8 million). Deferred tax assets of £nil (2011: £5.8 million) have been recognised in respect of these losses, reflecting their use to offset taxable profits forecast in future years.
Tax loss carry forward 12.9 (7.7) – 5.2 (5.2) – –
Stocks of shares are held in a number of open end funds managed by the Group and are classified as held for trading current assets.
18 Assets backing investment contract liabilities The following assets are held by the Group's life assurance and pooled pensions subsidiary to meet its contracted liabilities: Group £m £m
Investments in funds to hedge deferred bonus liabilities 11.5 – 11.5 –
Seed capital investments consist of amounts invested in funds where the intention is to dispose of these as soon as practicably possible.
Investments in certain Aberdeen-managed funds are held to hedge against liabilities from bonus awards that are deferred and settled in cash by reference to the share price of those funds.
Allotted, called up and fully paid: Nil (2011: 3,941) 6.75% Non-cumulative, non-voting perpetual preference shares of £100 – 0.4 2012 No. of ordinary shares millions 2011 No. of ordinary shares millions
Shares issued on conversion of 3.5% convertible bonds 2014 1.6 –
Earliest vesting dates 1 vested awards relate to good leavers, as defined by the rules of the deferred bonus scheme.
Awards made in 2009 to 2012 reach their earliest vesting dates in three equal tranches over a three year period, subject to the continued employment of the participant. On reaching the earliest vesting date, participants may require immediate exercise or may choose to defer exercise until a later date; if deferred, participants may thereafter require exercise, without condition, at any time (except during close periods) until the end of the exercise period.
Warrant and other reserve The warrant reserve was created on the issue of the convertible preference share units in June 2005. Each convertible preference share unit issued comprised one preference share and one warrant to subscribe for ordinary shares, of which £800 related to the preference share and £200 to the warrant. During the year, all remaining warrants were exercised or expired.
The equity element of the convertible bond, net of deferred tax, is shown within warrant and other reserves. This element of reserves will transfer to retained earnings on conversion of the bonds (note 33).
Foreign currency translation reserve The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries.
• the purchase and sale of own shares in respect of share based payments.
The total movements in retained earnings relating to the issue of the LTIP shares represent the value of the shares issued to participants in any period less the annual amortisation of these shares which is charged through the income statement.
These shares are held by the Group's Employee Benefits Trust for the purpose of satisfying deferred share bonuses that will vest in future periods.
The maximum number held by the Employee Benefits Trust during the year was 42,599,701 (3.7% of issued shares); (2011: 37,193,852, 3.2%).
The 7.9% Perpetual subordinated capital securities were issued on 29 May 2007. They have no fixed redemption date but the Company may, at its sole discretion, redeem all (but not part) of these securities at their principal amount on 29 May 2012 or any subsequent coupon payment date. In addition, under certain circumstances defined in the terms and conditions of the issue, the Company may at its sole discretion: • on any coupon payment date, exchange all (but not part) of the securities for fully paid non-cumulative preference shares in the Company. The preference shares would entitle holders to receive a preferential dividend, if declared by the Board, at a fixed rate of 7.9% per annum of their nominal value. Such preference shares may be redeemed, at the Company’s sole option, on any coupon payment date later than five years after their issue.
The Company has the option to defer coupon payments on the securities on any relevant payment date. Deferred coupons shall be satisfied only in the following circumstances, all of which occur at the sole option of the Company: • redemption; or
The Company's bank overdraft is part of a Group working capital facility in support of which cross guarantees are provided by certain subsidiary undertakings. At 30 September 2012 the net amount guaranteed under this arrangement was £nil (2011: £nil). The Group's bank borrowings are subject to a number of covenants which, in accordance with standard practice, are reviewed and discussed with lenders from time to time. The Board, having regard to its business plans is confident that the Group will continue to comply with applicable conditions for the foreseeable future.
Due to investors for open end fund redemptions 30.8 109.4 – –
As more fully set out in the discussion of principal risks on pages 31 to 33, the Group is, from time to time and in the normal course of business, subject to a variety of legal claims, actions or proceedings. When such circumstances arise, the Board considers the likelihood of a material outflow of economic resources and provides for its best estimate of costs where an outflow of economic resources is considered probable. While there can be no assurances, the directors believe, based on information currently available to them, that the likelihood of other material outflows is remote.
Carrying amount Fair value £m £m £m £m £m £m £m £m
The fair value of unlisted investments have been valued in accordance with International Private Equity and venture Capital valuation guidelines where relevant.
Where discounted cash flow techniques are used, estimated cash flows are based on management's best estimates and the discount rate is a market related rate for a similar instrument at the balance sheet date. Where other pricing models are used, inputs are based on market related data at the balance sheet date.
Trade receivables and payables Trade receivables and payables are typically settled in a short time frame. As a result, the fair value of these balances is considered to be materially equal to the carrying value, after taking into account potential impairment losses.
The assets above are all unit linked and held for the sole benefit of the policyholders within Aberdeen Asset Management Life and Pensions Limited. Investment and credit risk in respect of assets and liabilities held within unit linked funds is borne by the policyholders. Accordingly, these assets are not included in fair value measurements disclosure below.
Total £m Fair value through profit or loss Stock of units and shares in managed funds 0.2 – – 0.2 Seed capital investments 40.4 – – 40.4 Other investments 11.5 – – 11.5 Investments in life and pensions subsidiary 6.6 – – 6.6 Available for sale financial assets Other investments 1.4 – 35.8 37.2
Total £m Fair value through profit or loss Stock of units and shares in managed funds 0.4 – – 0.4 Seed capital investments 29.8 – – 29.8
There were no transfers between Level 1, Level 2 or Level 3 investments.
Investments classified as level 3 principally comprise investments in property funds. While the Group is not aware of significant differences between valuations received and reasonably possible alternatives, the value of these investments would be directly impacted by changes in the European and Asian property markets. The Group estimates that a 10% increase/decrease in the fair value of these investments will have a favourable/unfavourable impact on equity of £3.6 million.
Overview This note describes the Group's objectives, policies and processes for measuring and managing risk, and the Group's management of capital.
i) Risk management The Group is exposed to the following risks from its use of financial instruments: • credit risk
The Board of directors has overall responsibility for the establishment and ongoing management of the Group's risk management framework and the implementation and operation of the Board's policies are handled by the Group's risk management committee.
The Group's audit committee is responsible for overseeing financial reports and internal control. Internal audit assist the Group audit committee in its oversight role by undertaking both regular and ad hoc reviews of risk management controls and procedures and report the results of these reviews directly to the audit committee.
ii) Credit risk Credit risk is the risk of financial loss to the Group if a client or counterparty to a financial instrument is unable to pay in full amounts when due, and arises principally from the Group's cash and cash equivalents and trade receivables and accrued income.
A breakdown of the Group's relevant financial assets by credit rating is set out below.
Liquid investments in life and pension subsidiary 11.8 – – – 11.8
The Group adopts a low risk strategy in respect of its treasury management, at all times ensuring, as far as possible, that its capital is preserved and financial risks are managed in line with the Group's treasury policy as approved by the audit committee. The treasury function manage the cash resources on a daily basis in accordance with the treasury policy. We continuously monitor the credit ratings of all institutions where we deposit money.
Trade receivables and accrued income represent amounts recognised in revenue in the Group income statement which have not been settled by clients. Outstanding balances are monitored locally by senior management and historically the level of default has not been significant and in the majority of cases there is an ongoing relationship with the client.
The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation.
As disclosed in note 33, the Company has notified remaining holders of the convertible bonds that all outstanding bonds in issue on 3 January 2013 will be converted into ordinary shares.
iv) Market price risk Market price risk is the risk that the fair value or future cash flows of financial instruments will change due to movements in market prices, other than foreign exchange rates or interest rates. These financial instruments include the Group’s investments in seed capital and is invested to support the launch of new funds. Seed capital is typically invested in quoted funds for less than one year. These investments have been measured at fair value through profit or loss. Investments in property funds are usually for longer term (eg five to seven years) and are measured as available for sale. These securities are managed on an individual basis and all buy and sell decisions are approved by the GMB. The objective of market price risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. The Board sets the limits for investing seed capital and regularly monitors the exposure.
The following financial assets are exposed to market risk: Group Company £m £m £m £m
The Group's defined benefit pension schemes hold assets which are exposed to market price risk. Details of these assets are shown in note 32.
v) Foreign currency risk The Group is exposed to foreign currency risk at a transactional and translational level. Transaction risk is the risk that the domestic value of a foreign currency denominated cash flow will vary adversely. Translation risk arises from translating the balances of overseas subsidiaries which report their results in a currency other than sterling and therefore the sterling value of those balances could vary adversely.
Foreign currency transaction risk The Group undertakes transactions in a number of currencies and foreign currency risk arises through fluctuations in foreign currency changing the fair value or future cash flows of financial instruments.
Revenues are earned principally from fees which are calculated on the basis of the value of AuM managed for clients and many mandates include investments valued in currencies other than sterling. The fact that we operate on a global basis, with offices in a number of countries worldwide, means that a proportion of operating costs is also incurred in foreign currencies. Further, coupons on the 7.9% perpetual capital securities are incurred in US dollars. variations in the sterling value of these operating costs and interest cost will, to an extent, offset any similar impact of fluctuating exchange rates on revenues. The Board has therefore decided that it is not appropriate to undertake any specific hedging of the Group's revenues or costs.
The Group's financial assets and liabilities are denominated in the following currencies: Group
As at 30 September 2012 Total £m Sterling £m US$ £m
As at 30 September 2011 Total £m Sterling £m US$ £m
Interest bearing loans and borrowings 363.7 361.7 4.8 (2.8) – –
Foreign currency translation risk The foreign currency net financial assets and liabilities of subsidiaries which adopt a different reporting currency a re as follows: £m £m
The carrying value and maturity profile of the Group's and Company's financial instruments that are exposed to interest rate risk are shown in the following table: Group Company
As at 30 September 2012 Within 1 year £m 2011 Within 1 year £m 2012 Within 1 year £m 2011 Within 1 year £m
The impact of the assumptions on the financial assets and liabilities net of tax, are as follows: Group
Financial investments at fair value through profit or loss 3.3 (3.3) – –
Financial investments at fair value through profit or loss 2.6 (2.6) – –
Financial investments at fair value through profit or loss 1.6 (1.6) – –
viii) Capital management The Board's policy with respect to capital is to maintain a strong capital base in order to maintain investor, creditor and market confidence and to provide a sufficient base to sustain the future development of the business while at the same time ensuring compliance with all regulatory capital requirements. The Board receives monthly updates on headroom over regulatory capital and supervises key decisions that may impact the future capital position of the Group. Further information on the Group’s regulatory capital position is given below.
The Group uses cash generated from its operations to pay a progressive dividend. The Board seeks to avoid further dilutive issuance of new shares and has, since 2010, satisfied vesting of deferred bonus awards by purchasing shares in the market through the Employee Benefit Trust.
Group is required to maintain a minimum level of capital. In common with many other independent asset managers, the Group currently operates under the terms of a waiver from the requirement to meet the full consolidated supervision rules of the CRD. The waiver was granted by the FSA with effect from January 2007 and is effective until August 2014. However, the Board expects to achieve its objective of eliminating reliance on this waiver by the end of 2012.
31 Related party transactions In the ordinary course of business, the Company and its subsidiary undertakings carry out transactions with related parties, as defined by IAS 24 Related Party Disclosures. Material transactions for the year are set out below.
The principal subsidiary undertakings of the Company are shown in note 14. During the year, the Group entered into the following transactions with related parties: a) Compensation of key management personnel of the Group £m £m
The remuneration policy is described in more detail in the Remuneration report on pages 50 to 62.
b) Transactions with subsidiaries Details of transactions between the Company and its subsidiaries, which are related parties of the Company are shown below: £m £m
www.aberdeen-asset.com 119 c) Post employment benefit plans The Group operates and participates in several post employment benefit plans as detailed in note 32.
Outstanding at 30 September 2012 £m 2011 £m 2012 £m 2011 £m
Edinburgh Fund Managers Group plc Retirement & Death Benefits Plan 3.3 3.2 – –
d) Asset management vehicles The Group provides investment management services for a number of collective investment schemes where Group companies directly sponsor or are investment advisors of underlying funds, which meet the criteria or related parties. In return the Group receives management fees for provision of these services
The total contributions charged to the income statement in respect of the schemes operated by the Group were as follows: £m £m i) In respect of the Group’s defined contribution schemes: Pension cost charged to operating profit: UK schemes 9.0 9.3
The pension surplus and deficits of the Group are summarised as follows: £m £m
Disclosure relating to the Group's defined benefit obligations The information given in (1) and (4) below reflects the aggregate disclosures in respect of the Group's three UK defined benefit pension arrangements and the DEGI scheme in Germany. The information given in (2) reflects the three UK schemes only. The information provided in (3) relates to the DEGI pension scheme.
Basis used to determine the expected rate of return on plan assets To develop the expected long-term rate of return on assets assumption, the Group considered the current level of expected returns on risk-free investments (primarily government bonds), the historical level of risk premium associated with the other asset classes in which the portfolio is invested, and the expectations for the future returns of each asset class. The expected return for each asset class was then weighted, based on the target asset allocation, to develop the expected long-term rate of return on assets assumptions for the portfolio.
Mortality assumptions The mortality assumptions for the UK defined benefit schemes at 30 September 2012 follow the SINA LIGHT CMI 2009 1.25% (YOB)
tables. The impact of these assumptions on life expectancies is shown in the table below: 2012 Years 2011 Years
Expected age at death for a current male pensioner aged 60 88.6 88.2
www.aberdeen-asset.com 123 4) Aggregate disclosure obligations The following disclosure relates to the Group's three UK schemes plus the DEGI scheme in Germany: £m £m
Fair value of plan assets at beginning of year 127.0 116.7
Relationships between Aberdeen Asset Management and the trustees of the defined benefit schemes The schemes assets are held in separate trustee-administered funds to meet long-term pension liabilities to past employees.
Net liability for defined benefit obligations at 1 October 0.7 0.9 Contributions paid (2.3) (0.3) Actuarial losses recognised 1.6 0.1 Net liability for defined benefit obligations at 30 September – 0.7 33 Post balance sheet event On 31 October, 2012, the Company notified the holders of the 3.5% convertible bonds 2014 that all all outstanding bonds in issue on 3 January 2013, together with accrued interest on such date, will be redeemed. Bondholders remain able to exercise their conversion rights until 27 December 2012. As at 23 November 2012, holders of £68.1 million had exercised their rights to convert to ordinary shares with £21.9 million still capable of conversion or otherwise failing to be redeemed on 3 January 2013.
The liability for outstanding bonds of £82.7 million, stated before deduction of unamortised issue costs, at 30 September 2012 has been reclassified as a current liability.
We confirm that to the best of our knowledge: • The financial statements, prepared in accordance with the applicable set of accounting standards give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
• The directors' report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
– Amortisation and impairment of intangible assets (78.1) (77.8) (66.2) (30.1) (13.8)
Operating profit before amortisation, impairment and exceptional items 352.7 309.3 221.9 95.7 100.0
Assets under management at year end £187.2bn £169.9bn £178.7bn £146.2bn £111.1bn
United Kingdom and Channel Islands Aberdeen Asset Management PLC 10 Queen’s Terrace, Aberdeen AB10 1YG
Aberdeen Asset Managers Limited Bow Bells House, 1 Bread Street, London EC4M 9HH
Aberdeen International Fund Managers Limited Rooms 2604-06, 26/F Alexandra House, 18 Chater Road, Central, Hong Kong
Aberdeen Investment Management K. K. Toranomon Seiwa Building 11F, 1-2-3 Tonanomon, Minato-ku, Tokyo, 105-0001 Japan
Continental Europe Aberdeen Asset Managers Limited WTC, A-Tower, 3rd Floor, Strawinskylaan 303 PO Box 79074, 1070 NC Amsterdam, The Netherlands
Aberdeen Asset Management Denmark A/S Strandvejen 58, 2nd floor, DK-2900 Hellerup Tel: +45 33 44 40 00 Fax: +45 33 44 40 01
Americas Aberdeen Asset Management Inc. 1735 Market Street, 32nd Floor, Philadelphia, PA 19103
Registrar Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA
Auditor KPMG Audit Plc Chartered Accountants 37 Albyn Place Aberdeen AB10 1JB
Tel: +44 (0) 1224 631999 Fax: +44 (0) 1224 647010 www.aberdeen-asset.com