Man Group PLC

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Earnings Call Transcript 2022-Q2

[Operator]

Good morning, everyone. Thank you for joining us today. For those who don't know, I am Luke Ellis, the CEO of Man Group, and I'm joined by Antoine Forterre, our CFO. As usual, I'll start with some highlights and an overview of the first half of the year, and then Antoine will take you through the numbers. After that, I'll talk a bit about our growth as a firm and our outlook for the rest of the year, and then we'll open up for any questions.

As a reminder, to ask a question today, you'll need to access this presentation via the Webex link rather than the dial-in option. And I will need to unmute you once you've got your hand up.

As you'll be aware, the first half of the year was one of the most difficult periods for financial assets in a long time. Bond markets recorded their worst six month period since most records began in 1900 and developed equity markets had the worst first half in over 50 years. We've talked in the past about the diversification across our investment strategies, meaning, we should be able to deliver for our clients across all types of markets. Well, I'm delighted to say that we have delivered significant outlook for our clients in the first half, which allows us to report a very strong set of results today.

Despite generating positive investment performance in our alternative strategies and strong alpha from our long-only strategies, our AUM actually decreased by 4% overall, carried lower by the markets where we have beat in our products and by the stronger US dollar as we have so much non-US dollar-denominated business. We saw good inflows into our alternative strategies, partly offset by outflows in our long-only strategies as clients rebalance their portfolio at the end of the half, given market movements in the first half. I'll provide some more color on that later on.

Our absolute return strategies, which aim to perform regardless of the market environment made very strong gains for clients, demonstrating the value liquid alternatives can add to client portfolios and our ability to deliver uncorrelated returns and to add alpha at scale. Our core management fee EPS grew by 23% as we delivered another period of management fee growth and we saw a 28% increase in our total core earnings per share as the positive performance from our absolute return strategies I mentioned earlier, resulted in significant performance fee generation. This reflects another strong period of growth for the firm after the record-breaking year we had in 2021. We've talked about Man having a differentiated business model, and these results clearly demonstrate the power of that differentiation.

The Board has declared an interim dividend of $0.056 per share, in line with the half one 2021. As we've previously said, although our policy is progressive, we will keep our interim dividend fixed until we reach an interim versus final split in line with the market, and therefore, any progression this year will come through in the final dividend.

After completing the $250 million share buyback we announced in December, we announced our intention to buy back a further $125 million worth of shares at the 30th of June and so far we brought back $39 million worth of those as of the end of July. We're pleased that the continued growth and profitability of our business allows us to provide consistent and growing returns to shareholders.

As I've said before, the key strength of our firm is the ability to deliver alpha at scale through the combination of talent and technology. We're a global leader in technology-empowered active investment management with over 35 years of experience in extracting significant alpha from liquid markets. There are a few firms with the breadth of solutions we offer, the proven track record of investment performance and effective risk management that we possess. We also have the structuring expertise of flexible platforms to be able to meet our clients' needs, however unique, effectively and efficiently. All of that allows us to help our existing clients appeal to a wide range of new clients around the world and to stay relevant to those clients throughout market cycles.

Assets under management decreased from $148.6 billion at the start of the year to $142.3 billion at the end of June. Net inflows were $3.2 billion, and there was positive investment performance of $3.4 billion from our absolute return strategies, but this was offset by better exposure and our total return and long-only strategies. We also saw $4.6 billion of negative FX and other movements due to the significant dollar strengthening during the period. I would just highlight, if we happen to announce our AUM in sterling, it would actually be up about 8% for the half.

Engagement with clients remains strong during the first half. Net inflows were primarily driven by our absolute return strategies. We saw high client demand for AHL Alpha and for our institutional solutions, offset by a pickup in redemptions from May onwards as clients realize gains to manage other issues in their portfolios. These issues were not with Man. In fact, 80% of the redemptions came in products in the top half of their peer group. So it wasn't about performance, but rather clients found themselves with significant margin calls from FX and LDI hedging, as well as capital calls from private market managers taking them overweight their target alternatives exposure, leading them to make partial redemptions in performing liquid strategies. The good news for us was over 90% of the redemptions in Q2 were partial, that is, they're leaving the account open and thereby making it easy for the client to top up when their cash position is more comfortable.

Looking closer, it was pleasing to see inflows into our Japanese equity and high-yield bond strategies, both of which have performed very strongly this year, generating outperformance versus their benchmarks of 19.3% and 4.4%, respectively. Our overall net inflows of $3.2 billion were 2.7% ahead of the industry on an asset-weighted basis, not annualized at 2.7%, just in the half, illustrating the depth of our relationships with clients and the partnerships we've built over time.

I mentioned the very strong gains our return strategies made earlier. The trend following flagship products delivered double-digit returns over six months across the board, proving the significant portfolio diversification benefits of investing in trend strategies, especially in inflationary periods. Our multi-manager strategy has also made valuable gains for clients with our 1783 strategy up over 6% net in the half. While our long-only strategies were naturally affected by market beta, asset-weighted relative investment performance of 2.9% was extremely strong, which demonstrates the quality of our security selection and our risk management across the firm.

Our systematic long-only strategy has outperformed consistently over the year, delivering 1.7% of relative outperformance, while our discretionary strategies that run with higher tracking error outperformed by 4.9%, with very solid outcomes from our teams in credit, Japanese equities and also UK equities. A standout performer in the total return category was our emerging market debt strategy which finished the half about 25%, not basis points, %, ahead of its peer group, making a positive return in the half despite the chaos in emerging market -- debt markets. Overall, we generated $2.6 billion of net Alpha for clients during the first six months of the year.

I'm delighted to be able to make a real difference for clients in difficult times of their portfolios and thereby deliver strong financial results for our shareholders through a volatile period for risk assets. We've always been confident in our ability to deliver for clients and shareholders during difficult periods and these results are a reflection of the quality of our talent, our market leading technology and our very differentiated business model.

With that, I'll now let Antoine run you through the numbers.

[Antoine Forterre, Chief Financial Officer]

Thank you, Luke, and good morning, everyone. I'm pleased to present another strong set of results following the record breaking year we saw last year. I would start with some highlights before covering our AUM, P&L and balance sheet. At $855 million net revenue increased by 17% year on year, driven by both management and performance fees. Net management fees were up 12% versus H1 2021 due to higher average AUM, net inflows and strong performance from absolute return strategies. Performance fees were up materially compared to the same period a year ago. At $404 million we have reached the highest level on record for the first half. This illustrates not only the increased performance fee potential we spoke about at our Investor Day, but also the differentiated nature of our business model, which can and it do perform well in periods of market dislocation.

Fixed costs of $166 million were 5% higher than the first half of 2021, driven by the investments in the business we guided on previously and post pandemic cost normalization, partially offset by weaker sterling. Although variable compensation increase, given the excellent revenue growth in the period, our compensation ratio of 40% in the first half remains at the bottom of our guided range, in line with last year. Our core management fee profit before tax increased by 18% to $149 million, illustrating the very good operating leverage that our platform provides. Total core PBT increased by 22% to $395 million reflecting the value that performance fees generate for shareholders.

Finally, we continue to have a strong and liquid balance sheet with core net financial assets of $582 at the end of June. As Luke mentioned, AUM stood at $142.3 billion at the half year, with positive net flows of $3.2 billion over the periods, offset by market beta and FX moves. Net inflows into alternatives were $4.8 billion were driven by AHL TargetRisk and Man Institutional Solutions, partly offset by outflows from alternative risk premium. The net outflows from long-only of $1.6 billion were driven by Numeric Global and GLG Continental Europe, which more than offset inflows into GLG high yield and GLG Japan CoreAlpha.

On an asset weighted basis, overall net flows were 2.7% ahead of the industry, which demonstrates continued strong relative demand for diversified product offering. We generated an estimated $2.6 billion of Alpha for clients during the first six months of the year, including $2.1 billion in investment performance from our alternative strategies. This provided clients with valuable gains during the volatile periods, which is the best possible advertising for our strategies and solutions. On the long-only side, good Alpha generation was offset by market beta leading to a $7 billion reduction in AUM.

Finally, assets under management decreased further $4.6 billion, with $6.7 billion of FX impacts, partially offset by $2.1 billion of recurring movements categorized as other. As a reminder, 44% of our AUM are non-dollar denominated with main exposures to sterling, euro, Aussie dollar and Japanese yen. We were particularly pleased to deliver continuous growth in net management fees over the periods compared to both the first and second half of 2021. The main driver of growth continues to be our absolute return category through a combination of flows and performance.

At the end of June, our run rate net management fee margin was 66 basis points, 3 points above the run rate as at the end of 2021. The difference is entirely the result of the mix shift towards alternative strategies during the first half of the year. This increase partially offset the reduction in AUM discussed earlier, leading to run rate management fees of $937 million, marginally lower than at December 21.

As we've said before, we did not target a specific net management fee margin and is very much an output of the underlying mix of assets we manage for our client. We remain focused on generating profitable revenue growth in the various product categories that we run, considering the positioning, performance and capacity.

Moving on to performance fees. I'm delighted to report we have the best first half on record, floating on from already strong full year performance fees last year. This outcome, once again, illustrates the performance fee potential of our business and the value that it generate for shareholders. Performance fees were $404 million for the period. These were driven by the $187 million from ALH evolution and $183 million from other alternative strategies, most notably from the portion of the institutional solutions mandates, which crystallized the performance fees in the first half. Separately, we incurred mark-to-market losses on investments of $21 million, which predominantly relates to the CLO positions in our seed book.

As you know, many of our assets crystallized their performance fees in the second half. At the end of July, we had accrued, in our funds, a further $200 million in performance fees due to crystallize by December '22. This number is not a projection, but a snapshot of the position accrued in the funds we manage at a point in time. The amount that crystallize over the remainder of the year will therefore vary up or down based on the performance of the underlying funds over that period. But as of today, our strategies have navigated this year very well.

We now turn to costs. Fixed compensation costs increased by 6% to $110 million, reflecting continued investments in our team, partly offset by the strengthening of the dollar versus sterling. Other cash costs were roughly in line with H1 '21, with a normalization and cost post pandemic offset again by favorable FX moves. Considering the strong FX moves in the first half and the fact that 60% of our fixed costs are denominated in Sterling, we're updating the full year fixed cost guidance to $345 million. This reflects actual fixed cost for H1 and forecast for H2 simply restated at a 1.25 exchange rates. To be clear, this indicates no change to the cost guidance provided earlier this year.

As we've indicated previously, we are keen to capitalize on the growth we've seen and invest further in the business, but we'll keep applying the same cost discipline that has guided us over the last few years. Variable compensation costs increased due to higher management fee and particular performance fee revenues. Continued revenue growth meant our compensation ratio remains at 40% at the bottom of our guided range, reflecting an excellent field for performance fees. The result of all this is a PBT margin increasing to 46% compared to 44% a year ago, highlighting the positive operating leverage in our business in periods of strong revenue growth.

In summary, higher average AUM, continuing net inflows and strong performance fee generation led to a 17% increase in core net revenue compared to the first half of 2021. Together with ‘19 cost discipline and the impact of previous share buybacks, this resulted in core EPS growing by 28% to $0.24 per share in the first half of 2022. We previously provided a core tax rate range between 15% and 18% and expect to be at the higher end of that range for 2022, considering the level of performance fees crystallized during the year so far.

A few comments on the balance sheet, which remains robust and liquid. We had $582 million of core net financial assets at the end of June before the receipt of cash from performance fees crystallizing in June, the payments of the interim dividend and completion of a recently announced share buyback program. Adjusting for those three effects our net financial assets are roughly $730 million. We continue to deploy capital to invest in new strategies, with seed investments of $628 million at the end of the first half.

I mentioned at the full year results where we will consider the most efficient financing available to seed investments and support new operational initiatives, including using our revolving credit facility. This is why we had $120 million drawn at the end of June, which has now been repaid. You can expect us to continue to manage our liquidity more dynamically going forward. The strength and flexibility of our balance sheets allows us to invest in the business to support our long-term growth prospects, evaluate the many opportunities and ultimately maximize shareholder value.

As we have done in the past, we will continue to return to shareholders' capital that we consider to be in excess of our medium-term requirements. This is why we announced $125 million share buyback at the end of June. In addition to the interim dividend declared today, we will be returning almost $200 million to shareholders in relation to the first half of 2022.

To conclude, the strong results, we will be a first of our people, highlight the benefits of our differentiated business model, demonstrate the growth potential of our firm and give us full confidence in our strategy. And on that point, let me hand back to Luke.

[Luke Ellis, Chief Executive Officer]

Thank you, Antoine. Earlier this year, we hosted an Investor Day to highlight the key strengths of our business and why we believe our differentiated proposition positions us well for growth in the future. You can access the slides and recording on our website, but I'd like to touch on why I think we are well positioned for long-term growth.

Large institutional investors have an insatiable appetite for Alpha to enable them to reach their target returns. And our business is designed to deliver them that Alpha at scale. The breadth and quality of what we do and the range of different and distinct approaches to investing at Man Group is compelling for our clients.

We're an Alpha-focused asset manager, and we aim to have as many different sources of high-quality Alpha available for clients as we can create. We grow by adding new sources of Alpha through organic innovation, recruitment and acquisition. We also grow by improving our existing Alphas and by increasing capacity in those Alphas by improved trade execution.

Liquid alternatives continue to be a significant part of the solution for clients to navigate the current and future macroeconomic environment. Client demand for alternative managers with excellent risk management skills who can deliver fixed income replacement strategies with what used to be thought of as bond-like returns continues to grow, and that is an area in which we are the global leader.

Continuing to invest in our people and our technology is critical to our ongoing success. It's the combination of talent and technology that gives us a real competitive advantage and a leadership position in alternatives, quant and solutions. This allows us to deliver for our clients, which drives the sustainable growth of our business and so value for our shareholders.

In the first half of '22, we've performed very well. And the growth we've seen illustrates the strength of the firm we've built. We delivered 12% growth in management fees and 23% growth in core management fee EPS versus the first half of 2021. We had a strong performance fee outcome enabled by our ability to generate Alpha at scale across a number of strategies. These results reflect the benefits of investing in liquid alternatives, our ability to deliver uncorrelated returns, the demand for the diversified range of Alpha-focused strategies we offer and the value our technology-enabled operating platform adds.

We've consistently delivered growth in our core business over the past five, six years. Our net management fees have grown 38%, our core management fee profit before tax has nearly doubled and importantly, our management fee earnings per share grew up 117%, reflecting the impact of our ongoing buyback program. Performance fees are a very valuable earnings stream for shareholders. We've increased our performance fee eligible AUM by 52% since June 2017, which means the same percentage return creates more -- meaningfully more performance fees. This year, we've really seen the benefit of the diversified range of performance fee earnings strategies we offer.

And importantly, how many more dollars of performance fee profits we can generate on our larger performance fee eligible assets. This real progress highlights our clients' confidence in our ability to manage and grow their assets and our focus on running the business efficiently to translate investment performance and inflows in into profitable growth for our shareholders.

It's been a strong start to 2022 for Man Group. We've always been confident that differentiated resilient firm we've built over the years will deliver in periods like we've just witnessed. As Antoine mentioned, we have very significant accrued, but unrealized performance fees as of today. They're not in the accounts, but they are there to be earned in the second half. We don't and can't predict future performance fees in any single period. But at the recent Capital Markets Day we showed what we think is the distribution of future performance fees looks like. A key driver for when we'll be higher or lower on that distribution is the cross-asset correlations. The lower the cross-asset class correlation, the more opportunity there is to make performance fees in our macro strategies. That's what we saw in the first half. The lower the inter-stock and inter-bond correlations, the more opportunity there is to make Alpha in our security selection strategies, as again we saw in the first half.

The economic uncertainty that's been created by the return of inflation in developed markets has led to an environment where our strategies have benefited. The longer we do not get a return to the great moderation, frankly, the better for our Alpha generation. On the client side, and I know this is where many of you are super focused. Flows going into the second half, we see two big effects. We're seeing lots of demand for liquid alternatives and trend strategies as clients look for investments that can make them positive returns if the economic environment continues to be volatile. I don't think we've ever had as many ongoing conversations about potential new alternative solutions. So obviously, we don't know which will result in flows until the check settle.

But against that, in the last eight weeks, we've seen a number of unexpected and unpredictable redemptions as clients use our products and solutions as easy sources of cash to meet issues elsewhere in their portfolios. Because those redemptions are not due to our performance or our -- and other issues we can control, it's very hard to predict how long they will continue or how many they'll be. The actual net flows in the second half will depend on the balance between these two effects. We have the good inflows of new products, but we don't quite know where we will be on outflows. Medium and long term, we're very confident our demand picture is robust.

Looking forward, our focus remains on protecting our clients' assets, providing bespoke solutions to meet their investment objectives, increasing the diversification of our business and creating sustainable value for our shareholders.

And with that, we'll open up for questions. As a reminder, to ask a question you need to have joined the presentation via the Webex link on your screen and there is variation by device, but press the raise hand button to notify as you’d like to ask a question and you will automatically join the queue. I’ll then call in turn and then once I called you’ll need to unmute yourself once we call your name out.

And with that, we will dive into the question. And I believer Arnaud was first because his hand was up right at the beginning. Arnaud, can you unmuter yourself and away with the questions.

[Arnaud Giblat, Exane BNP Paribas]

Good morning, Luke. Good morning, Antoine. I've got two questions, please. If it's okay, I'll ask them one by one. My first question is on the losses on your book. None of the alternative managers have reported any losses on their CLO yet you have. I'm just wondering if this is a function of you marketing to market draw and marketing to model or if there's anything going on with your CLOs?

[Luke Ellis, Chief Executive Officer]

No, no. It's a very simple answer. We mark to market, and so it's a pure mark-to-market effect. I would say one of the things from a big picture is the credit risk that you get from having some CLO exposure on the balance sheet. It is naturally offset by the positioning in difficult credit markets that evolution will take on. And so we're not worried by the exposure we get, but we mark it to market, because we believe in daily mark-to-market.

[Antoine Forterre, Chief Financial Officer]

And so the US and euro indices for CLOs were down 5% and 8%, respectively, in the first half. And second, because of the risk retention rules in Europe, a chunk of our CLOs are in Europe. So there will be an FX impact as well.

[Arnaud Giblat, Exane BNP Paribas]

Very clear. Thanks. My second question is on TargetRisk. That product had some challenging performance this year. I think it's designed to protect downsize getting back volatility in difficult markets. So could you talk a bit about the performance of that product? And I think -- I mean, we estimate that you've had about $1 billion of outflows this quarter. Is that a number you can confirm? And what's -- can you talk maybe about the conversations you're having around that product with clients? Thank you.

[Luke Ellis, Chief Executive Officer]

Sure. The thing to remember in TargetRisk is, it is a long-only asset allocation product. So it is always long, it's a question of how long. And it never goes short, and in fact, it has a sort of minimum long exposure or something. So there are two ways clients look at it. And the majority of clients look at it relative to a 60:40 type of benchmark. And year-to-date, I think it was 2%, I can't remember the exact number, better than the Vanguard 60:40 in the first half of the year.

The risk management helped. It didn't get out of the way of everything, but that's -- we had a volatile first half of the year. But the risk management really did help. There are some clients who look at it on a pure basis compared to zero, in which case they were disappointed by the performance.

When you look at the products that you're seeing, those are the retail versions of the product, which is a relatively small, like, everything else we do at Man, a relatively smaller proportion of the AUM that we have invested in the TargetRisk product. The institutional client base is very much in the camp of looking at it relative to 60:40 and we had net inflows from the institutional market in the first half. We had some retail outflows which I can't offhand say what the total was, but I'm sure your math isn't going to be horrible. But it doesn't reflect what's going on in the main book of TargetRisk.

[Arnaud Giblat, Exane BNP Paribas]

Okay. Thanks. And my last question is with regards to AHL Alpha. So it seems like you had inflows this quarter. Could you comment on the type of clients that have come in? What margin this business has been brought on at?

[Luke Ellis, Chief Executive Officer]

The -- so client wise, it's our usual client base in a reasonably accurate weighting, so call it 80:20. We've seen inflows from sovereigns, from pension funds. We've seen some profit taking from people who like the fact that they've made double-digit returns in the first half of the year. But sort of overall add and then some inflows into the retail products. Even AHL diversified had some inflows in the first half of the year. And margin-wise, the flows are very much in line with the back book. A couple of people commented on what's going on in the basis point margin and alternatives. That's just the book mix within alternatives the -- I think, don't write this one in a research piece, but to the best of my knowledge, we didn't reprice a single thing down in the first half of the year in this space.

So any -- there's just mix effects between what's into Evo, what's into -- what we would call full-fat Alpha, what's into Alpha excluding Evo.

[Arnaud Giblat, Exane BNP Paribas]

Good to hear. Thank you.

[Luke Ellis, Chief Executive Officer]

Thank you very much. Next, we have --

[Antoine Forterre, Chief Financial Officer]

[Antoine] (ph) is on the button.

[Mike Werner, UBS]

Mike Werner. [Multiple Speakers] Great. Thank you. So two questions. Just following up on the fee margin. You noted, with an alternative coming down half-on-half, but within the absolute return bucket, we saw a noticeable decline. So I was just wondering from a NIC's perspective, what explains that in the first half?

And then second, you noted that M&A is a continuing process for you guys. I was just wondering as a bit of an update, what you guys have been seeing in terms of kind of the bid-ask spreads on privately held asset managers that you might be looking into and how that's developed over the past three to four months? Thank you.

[Antoine Forterre, Chief Financial Officer]

[Multiple Speaker] So I’ll expand a bit on what Luke mentioned earlier. The main effect is kind of mixed within the category. And that's because some of the programs that have slightly higher fees, say, evolution or capacity-managed, so most of the [indiscernible] will go into Alpha, for instance, which is [indiscernible] the fee margin.

The key, as we've highlighted and repeat is profitable revenue growth. If you look at the dollar revenue run rate from absolute return between end of December and end of June, it's increased by over $60 million from $474 million to $539 million, and that's what we focus on is profitable revenue growth, the margins and an output of where flows come in.

[Luke Ellis, Chief Executive Officer]

And on the M&A topic, I think -- so there continues to be a lot of businesses that are investigating their future. They come into two camps, one is the ones with weak returns. And I see no reason why we would buy a business with weak returns, anything we would buy has to maintain the quality of the content we have. So we can ignore those. On the ones that have strong returns, it's -- what we've seen so far is it’s clearly true that the number of bidders has dropped. What we haven't yet seen is whether the clearing price has dropped. What typically happens in these things is the private sellers take some period that looks like six or nine months to potentially adjust to what's going on in the public market. We continue to be disciplined about what we'll do. We continue to look at things. We have the capability of doing stuff, but it's got to be good quality content at a reasonable price. If we find that, we will definitely do something and if -- I mean, one would hope that the prices should become more reasonable with less buyers, but let's see. Thank you for those.

[Antoine Forterre, Chief Financial Officer]

Showing here as [Rivero] (ph).

[Luke Ellis, Chief Executive Officer]

Someone may have type their name in, because can’t see that far away.

[Antoine Forterre, Chief Financial Officer]

He should be unmute now.

[Unidentified Participant]

Hello?

[Antoine Forterre, Chief Financial Officer]

Yes. We can hear you.

[Unidentified Participant]

So -- you talked about the absolute performance funds and AHL and the opportunities they present. Can you give us any sense of what the capacity is for these funds?

[Luke Ellis, Chief Executive Officer]

We don't separate out all the individual funds' capacity at any one time. There is plenty of capacity and different versions of things AHO is producing. They're always working to increase the amount of opportunity. One of the things that the higher volatility in market does with the way we operate the strategies that -- because we believe in scaling positions to the volatility in the market. That actually means that we're running less notional positions, which actually means it creates some capacity while stay high. But I mean, at the moment, we have enough capacity that, that isn't a challenge in terms of future flows. Thank you for that.

[Antoine Forterre, Chief Financial Officer]

Haley, going to you.

[Haley Tam, Credit Suisse]

[Technical Difficulty] from me, please. And the $200 million performance fee that you've accrued but not crystallized in July. Can you tell us how much of that is from absolute return and institutional solutions or some idea where that's coming from at the moment that would be great.

Second question, just in terms of the -- well, it's reassuring to hear that more than 90% redemptions in Q2 were partial and they reflect to these liquidity calls. And I hear what you said about it being unpredictable. Can you give us any idea of where those flows actually came from in H1 with their particular underlying products? So how you think about that? And then the final question, just in terms of new sources of Alpha generation, can you say something about the pipeline there that would be great? Thank you.

[Antoine Forterre, Chief Financial Officer]

I'll take the first one.

[Luke Ellis, Chief Executive Officer]

Yes.

[Antoine Forterre, Chief Financial Officer]

So the -- we don't disclose it, but the mix is pretty similar. You'll recall that the funds are crystallized mostly at the end of the year are on Alpha dimension. And then throughout the year you have some dollars for high funds, but there's also a series of industry solutions, then you can proxy the sort of mix as a function of H1 for the remainder. In addition, we have some discretionary absolute return strategies are crystallized in December as well.

[Luke Ellis, Chief Executive Officer]

And looking at the low picture. A good example of what I'm talking about. So our alternative risk premium strategy, which has good long-term performance made good money. Last year was up five or six – five and change, I think, in the first half of this year had noticeable outflows in that period. You could see it's not about the performance of our strategy. And none of the investors has given up on alternative risk premium. They just wanted something and they were using it as an easy source of liquidity. It has very liquid position, so we were able to send them the money quickly and hopefully that means they can come back in again in the future.

So the actual outflows came in a variety of things. We saw some people take some money off the table in AHL Alpha, we saw people take some money off the table in Global equities. But the essence of it is always this thing of -- imagine if you take a classic UK pension fund, you all know the market there almost all of them are LDI hedged. On your LDI hedge, given a 150 basis point, 200 basis point move. In gilt, you're looking at 10% to 15% of the pension plan capital call that you got to meet at midyear. They look to where could they get liquidity, where could they maintain the relationship, get liquidity and see when their cash position's better off.

So -- that's sort of the example of it. It wasn't particularly concentrated. That's part of what was odd about it. But ARP probably suffered the most.

[Antoine Forterre, Chief Financial Officer]

Sources of Alpha.

[Luke Ellis, Chief Executive Officer]

Our new sources of Alpha. Look, I never like to pick individual ones out, because as we've talked about we have a sort of 50:50 hit rate across the firm in different things. And so we think it's really important to keep trying things and recognize that not all of them will work. And what's important is that you don't lose too much money in the things that don't work and you make lots of money in the things that do work.

We've obviously seen market shaking quite hard in the first half, but that has actually given us an opportunity to push harder into some of the things, and for instance, build out our ECM strategies that we can -- while other people are running because there's been less IPO activity. We've used it as the opportunity to retool the teams and therefore be in a better position for future Alpha and therefore future growth.

[Antoine Forterre, Chief Financial Officer]

Thank you and we'll get you to Samarth now.

[Samarth Agrawal, Citi]

Hello? [indiscernible]

[Antoine Forterre, Chief Financial Officer]

We can hear you.

[Samarth Agrawal, Citi]

Okay. Great. So my three questions. hopefully, short and simple. First on redemptions, so you said redemptions started from May. I mean, in your view has it peaked? Or are you still seeing it continuing into July? And what's the outlook into second half? So that's the first question.

[Luke Ellis, Chief Executive Officer]

So let me deal with that. The -- what I've tried to reflect is market -- so hopefully, this month market will be quiet so we could all have a break, because my guess is everybody on the phone is feeling pretty naked after the first half of the year. But the reality is once we get to Jackson Hole, once we get into the set Fed meeting, we're going to -- either the Fed is going to call the market's bluff or vice versa. And I suspect we're in to more volatility in the last part of the year, that is going to drive client behavior.

We see lots of demand, but on the redemption side it's just impossible to predict. That's not -- I'm trying to be honest with you all. This is going on across the asset management industry. We never try and say, well, that redemption doesn't count because it was a one-off. Like, we include everything in the picture. And we're trying to tell you what we see going on across the industry. And the truth is anybody who thinks they can predict their second half net flows is bluffing. So we don't -- we try to tell you it's uncertain, and that's because it's uncertain, because that's what we see. What we could see is a big pipeline of inflows. And I just don't know. It's quiet at the moment, but it's August and any sensible person who is trying to work out how they can get somewhere to put their feet up.

[Antoine Forterre, Chief Financial Officer]

I'll go back to you, Samarth. He mentioned three questions, but you seems you unmuted yourself.

[Samarth Agrawal, Citi]

I was not able to unmute myself. The second question is on client engagement. So I mean, your performance is quite good compared to other asset managers. I mean, are you making inroads into newer set of clients on the back of your performance? I mean, how are those discussions going on? Just wanted to hear your thoughts around that.

[Luke Ellis, Chief Executive Officer]

Yes, look, we continue to make -- we continue to make very good progress in doing more with our existing clients, which is, in the end, always the best value business you could do, as well as to do things with new clients. And we did our first institutional solution for a Latin American client last month or the month before, just as a random example. But the -- there is really lots of demand out there for what we do. There are lots of demand for -- especially the institutional solutions product, but also all of the other things we have in alternatives.

When the foot comes off the neck of markets there will be more demand for the long-only product, and we've certainly seen good flows into Japan and into the credit long-only strategies, which gives you a sense that sometimes people will look through. I'm really not worried about the forward demand for our products, for our content. We're very confident about that. It's just the clients managing their portfolio exposures in the short term is impossible to be sure what's -- how long that goes on for.

[Samarth Agrawal, Citi]

Thank you. The third question is on AHL Alpha, I presume it had record inflows this quarter. Just wanted to understand the capacity at AHL Alpha and the fee margins that we generate from that strategy?

[Antoine Forterre, Chief Financial Officer]

Let me take it.

[Luke Ellis, Chief Executive Officer]

Sure. Your turn.

[Antoine Forterre, Chief Financial Officer]

Capacity is very large, as we alluded to before. It's the long-standing program at AHL, which a lot of the innovation goes in. So capacity remains very large. The margin, for internal purposes, you can think of the sort of blended margin of the category and then there's some level of discount, depending on the size of the mandate that we get. But to the earlier discussion around overall margin for the absolute return category, the focus is on growing that organically. So the margin will be at the blend of where it's been in the past.

[Samarth Agrawal, Citi]

Okay. Thank you very much. That’s all.

[Antoine Forterre, Chief Financial Officer]

Arnaud, I'll go back to you. Looks like he have another question.

[Luke Ellis, Chief Executive Officer]

Yes, we can hear you. Go ahead.

[Arnaud Giblat, Exane BNP Paribas]

Sorry, can you hear me now? Just two very quick follow-ups. You mentioned in the presentation $200 million of accrued performance fees. Can I check the language there? I mean it's accrued but it hasn't gone through the P&L?

[Luke Ellis, Chief Executive Officer]

Yes. So we are very clear e will only put into the P&L performance fees, which have been crystallized. So we -- the performance fees as of the end of June are ones that have crystallized in the first half. The $200 million is in end of July and being clear, it's end of July, not end of June, accrued performance fees. So what that means is, if the performance of every strategy from the end of July to the end of the year was exactly zero, that's the amount of performance fees we would book at the end of the year. Obviously, the likelihood of all strategies with zero is zero. So the actual number will be higher or lower depending where we make money or don't.

[Arnaud Giblat, Exane BNP Paribas]

And my second question was on the US deferred taxes. So your tax rate has historically been low because of the US. I don't think you pay tax there. How much losses can you use into the future?

[Antoine Forterre, Chief Financial Officer]

So there's another $70-odd million of deferred taxes in the US. And as we've indicated or guided, we expect that by 2024, we'll start to pay taxes in the US, and that's why you should look at kind of forward guidance and tax rate, there's a bit of an increase next year depending on possibly, now it seems the corporate tax rates increasing in the UK.

[Luke Ellis, Chief Executive Officer]

Hey, maybe Liz is going to value add on that one.

[Antoine Forterre, Chief Financial Officer]

And then in 2024, the increases -- the tax losses, therefore, the tax asset being exhausted in the US.

[Arnaud Giblat, Exane BNP Paribas]

Thanks.

[Luke Ellis, Chief Executive Officer]

Superb. I can't see if there's anymore.

[Antoine Forterre, Chief Financial Officer]

Samarth, is anything else

[Samarth Agrawal, Citi]

[Multiple Speakers]

[Antoine Forterre, Chief Financial Officer]

In which case, I think that is it.

[Luke Ellis, Chief Executive Officer]

That is it. Thank you very much, everybody. Have a good break over the summer and here's to be making lots of performance fees again in the second half. Cheers, everybody.

[Antoine Forterre, Chief Financial Officer]

Thank you.

[Luke Ellis, Chief Executive Officer]

Thank you.