Record plc (REC) Earnings Call Transcript

Good morning, and welcome to the Record plc Full Year Results Investor Presentation. [Operator Instructions] I would now like to hand you over to the management team of Record plc, Dr. Jan, CEO; and Richard, CFO. Good morning to you.

Good morning, everyone. So yes, very excited to be here today, and we'll go straight into the presentation, and I'll start with a couple of words about Record as a business. And then we can see the questions as they're being submitted. So we'll try to take as many questions as we can as we go along. But otherwise, once we talk through the slides and so go through the many questions afterwards. Here on -- if we start with Slide 5, that gives a nice overview of Record as a business. We're not going to go through to all of the numbers, but importantly, we've been around for 40 years, the Record was found in 1983, originally as an FX specialist and from that basis, has grown into fully fledged derivatives managers. So still a lot of what we do is overlay structures, derivatives, options and other sort of risk mitigation techniques for large institutional investors. So assets under management as of this year are just over GBP 100 billion AUM from investors in Switzerland is a big location for us, but also Europe in general and the U.S. So those are the 3 jurisdictions that we focus on, but we do have clients in most other to global hotspots as well, such as Australia and Asia. How do we define ourselves? In a sentence, we say we are a specialist asset manager because what we do when we offer the products, we focus on -- tend to be very specific. So we say we're a specialist asset manager focusing on best-in-class products for large institutional investors. And I think every word in that sentence has quite a lot of weight for how we do business and how we think we will continue to grow in the sense that we are large now with our AM, but of course, we were still a lot smaller than other much, much bigger houses. So what sets us apart is the ability to offer customized solutions at very large scale, and that's what we do. So we can deliver mandates that are in the billions, we can typically launch these quite quickly whenever we say we can be we're able to follow through and do that in a matter of weeks, which is value to our client. And because at the same time, with about 100 employees, we are still quite nimble and flexible compared to larger houses. So that's where our competitive advantage sits compared to smaller competitors and large competitors. It's that -- it's that space where we can customize yet deliver at scale. So we're a bit more flexible than the really big houses. And that's also an advantage, which we're trying to play as often as we can. Teams are located in Zurich, Amsterdam, London and the U.S. So that's where [indiscernible] and again, in line with -- and in line with where our clients are located. Well the hub really for us is based in London, where we're trying to have teams on the ground to look after clients wherever possible. And again, that's very much in line with our clients being large investors, which means that we have -- So they're demanding side. So we spend a lot of time servicing these clients. We have grown, particularly in the last couple of years. So AUM in 2019 was around GBP 70 billion. And we're now proud to as earlier mentioned, have reached GBP 100 billion. So the business model has been working for us. And so in that sense, we're excited to now proceed very much in the same way that we move forward. And we're regulated just as a last sentence to the slide, we're regulated on the FCA in the U.K. and that very much allows us to do any business in the U.S., Switzerland and Australia, but we're separately regulated on the BaFin in Germany, which cost covers the EU. So that's quite important as a setup for us and that really comes all of the Europe also following Brexit we have the licenses to be active here, but we can branch out successfully from here into the world. So if we take Slide 6 -- especially to Slide 6. So who are our clients? As I've mentioned earlier, who are the large investors? Generally in the world, it's predominantly pension funds. So our client base comprises to a large extent of pension funds followed by foundations and other asset managers. So that probably describes almost the entirety of our client base. What that means? Again, in the light of what I described earlier in terms of what do we do well, when are we competitive? When are we able to win mandates is when we're able to address the requirements of a client, almost 100%. So really, if there's any desire for something that's slightly streamlined, if the requirements is in entirety to do it faster at a certain price point, there tends to be other companies who compete well. But when it's about having somewhat specific complex requirements and addressing them exactly, that's where we excel. And once we done that, then that translates with high emphasis on service on our side into a very long-term client relationships. So what we see on this slide is the average time client has been with us. So in a sentence, about half our AUM is from clients who have been with us for more than 10 years. So for us, these are very valuable and enjoyable client relationships where once we work with an institution, we tend to work with them for a long time. And yes, so this slide shows the products, the way we define them now. And again, this is something where we've done a lot of work in defining the product range, exactly the way we see it here in part also in response to the growth we see. So if we were to go back, say, 10, 12 years in the history of the business, then products would have been probably less clearly defined. And bigger teams would have simply addressed all investor needs. But with I think clients who are continuously demanding what they expect from service providers and also the growth we've seen, we now have structured the business very much along these 6 product categories, so almost 7 products with customer solutions. But that's really the way the business is now positioned. That's the way we look at the clients. That's the way the investment teams are structured and that's also the way we structure the sales teams. And again, there is -- in the positioning of the business, it is important to have salespeople who are highly specialists in these products, and that means typically salespeople do not cover a lot of these products, but at most 1 or 2 because we prioritize debt and specific knowledge in these products overcovering the whole range and how we present to clients. So just briefly walking through these products. On the left-hand side, we have the labor risk management on the first 3 products, which is as I said earlier, that's really moved in the FX history of the business, but this is taking care of managing the kind of risks that international investors exhibit based on the international investment activity. So what happens is when a pension fund, for example, a U.K. pension fund, has obligations through their pensioners in the U.K. So they have to pay pensions to U.K. pensioners in serving, but they will typically want to invest globally. So what happens is that between the international investments and typically, there will be a large U.S. position because the U.S. is seen as attractive, certainly in part to the portfolio. That means there is now a risk from U.S. dollar to sterling and the pension fund needs to decide how to manage this risk. And they can either remove this risk in its entirety, which is of a passive hedge, which is the first box we see here or they can decide to remove that risk, but at the same time, pursue a value-add from that strategy, which is the third box we have here, which is active FX hedging. And next, the 2 products, which for us go back to really the early days of the business. So these are service-oriented products. They're very operationally focused products. So if we take a positive hedging mandate as an example, if the GBP 1 billion of FX risk has to be managed in these programs, then that as a part of the portfolio turns over multiple of times over the years. So it's not by the same thing as simply holding an equities position in the business, which once you invested is on your book. But these are mandates where the contracts roll over and cash flows. And also importantly, the rebalancing has to be taken care of by us in delivering this as a service to the client. So in a passive hedging product, for us, that really means that we deliver an operational service and in a lot of cases, the value really is from a client point of view. We do have all of the check balances and operational sophistication of players to do this safely. So these are oftentimes things where from the point of view of a team that outsources this to us, the risk for them to do that in-house is simply too large because there's very little tolerance for errors simply because of the size of these mandates. So if you put that into context, we trade on the GBP 100 billion of -- or GBP 102 billion of assets under management. Our annual trading volume is in excess of GBP 700 billion. So that's GBP 0.75 billion -- GBP 0.75 trillion, sorry, so in excess of GBP 700 billion. And on a normal day, would trade GBP 2 billion to GBP 3 billion in volume and on peak days, we trade GBP 10 billion to GBP 12 billion. So this is a highly trading and operation involved service that we offer. And again, there's not a lot of people who can do quite as well and quite as safely as which is a nice competitive advantage to have. And as the label says, risk management is a nice part of the business that it is relatively independent of market movements for us as a line of business, but it is really an operational service. So with the client jurisdictions that we have, that's a very safe part of the business for us for as long as we do an excellent job, but we are not overly reliant on external factors, which is, of course, different for different strategies where -- desire to add a return, but there's more of a reliance on how does the world now change? And am I correctly positioned. Hedging for asset managers. The second box is really a service that has evolved from their service for large institutional investors the way I've just described it. In that the private market industry has grown over the last 20 years, but especially over the last 5 to 10 years. And that means there's now an ever larger number of private market funds that receive investments, that are still growing and that are being launched. And again, it's part of the bigger movement from -- there's a trend from public equities to private markets, but there's also big movements still in bank disintermediation that support these trends. But for us, it simply means that the more funds are being set up, more funds are there, which [indiscernible] the bigger the need for service providers like us to support these funds really in specializing on what it is that they do well. So if we take, say, private debt or private equity managers as an example, that's their business, or real estate. Their business is real estate, their business is private equity. Their business is private debt. So when they launch these funds, typically there is an opportunity for us to take the FX services on these funds off their hand and take care for them off that. So they can focus on what is core of their business. And yes, that's something which initially is approved organically for us, almost without us really noticing because we started to offer that service really simply based on what we have always done for pension funds and foundations, but -- which we've now positioned as a stand-alone product with a stand-alone team to really look after these funds as they evolve. And again, yes, so it puts us into a very strong position because it's quite complicated as a service to do this because the private market world has typically not a lot of cash so to offer risk management service, the way we offer it in an environment where there is limited cash or where there's opportunity costs to this cash that's held at fund because real estate funds wants to hold as little cash as possible to be maximum invested in real estate, means that there's nice opportunities for us to do the risk management in an excellent way and be appreciated in that capacity. Active FX hedging very much for us a service that we see demand for in the U.S. So U.S. investors typically look for slightly more active services in the way they manage certainly currency risk. That's in part a function of the U.S. dollar being a more dominant currency. So from the point of view of a U.S. investor, they do have foreign exchange concerns, but they're typically small and from the point of view of a European investor because they are already majorly invested in U.S. dollars. So they can take a slightly more active role in what is a smaller concern in the totality of the portfolio. But again, for us, as a London-based business, it's a great market language-wise and culturally, it's a great shift and again we've seen that part of the business grow. So we've hired in the U.S., and we're supporting those efforts. The FX Alpha moves us over to the return-seeking strategies is -- FX Alpha is really the question, how do I trade currencies globally if my sole objective is return generation throughout very much any environment I might face in the future. For us, that's expressed in our multi-strategy product which is a product that combines several systematic return streams, most of which have been live since 2009 or 2012. So we have a long track record. And today's strong form, it tends to be smaller mandates because the size of the mandate is not informed by the size of an investor's international asset allocation, but it's typically informed by how much risk do they want to take compared to what we compete with here, which might be hedge funds or other CJ strategies. So these are typically smaller mandates. But again, so it's something that we've seen a lot of interest in. Again, in part, a lot of the conversations we're having here is really clients also reacting to geopolitical tensions and political uncertainty around the world and a bit of a movement around. So there's a presentation of certainly globalization has come to a bit of a stop, if not reversal. So people's views, investors' views around these themes tend to diverge a little bit more. So we tend to get more enquiries where there's a question, can you -- can we implement the view exactly the way I perceive these risks or exactly the way I assess these opportunities. Just at that point, before I move on to the asset management range of products. Almost everything we do is -- I'm not going to say entirely systematic, but there's a strong systematic core to everything we do from active hedging to FX Alpha, but also to the passive hedging processes is there's lot of organization, but also systematic cost to these strategies. So we're not very much a [indiscernible] portfolio manager but a systematic and process driven portfolio manager. Again, with the intention very much of giving clients a stable experience throughout a number of years and avoid any some changes to the service of investment experience that they receive from us. Right hand side, in blue at the top of asset management products is sort of more recent additions to the product range and in most cases, is related to things that we've done for clients or that we've -- services that we have been delivering for investors, where then over time, they grew in a way that enabled us to turn them into stand-alone products and where we feel now this is important for us. It's big enough for us to have a team focusing on that. And that's the first example being the EM Sustainable Finance Fund, which has EM debt, but it's EM local debt which we launched in 2021 in collaboration with UBS Wealth. And here, the goal is to through the deliberate use of FX contracts are very much by derisking the investments of multilateral development banks into emerging and frontier countries, to not only create a portfolio that's attractive from an investor's perspective within an asset class. So asset product, this runs against the usual benchmarks in the [indiscernible] will run against [indiscernible] as a local currency benchmark and has done very well. So I think it's up 20% since inception. But what the team does and we now have a stand-alone team really sort of dedicated to this product. So they work closely with the multilateral development banks and development finance institutions in assessing when our investments into emerging frontier country is made, and what's the need to really take a currency risk as part of these transactions and [indiscernible] in a diversified portfolio such that the recipient of these loans can receive a loan in local currency. So this is all about ensuring that someone who borrows in Georgia can do so [indiscernible] doesn't have to do this in U.S. dollars. And the multilateral development banks are limited in their ability to take FX risks, limited [indiscernible] statement, they're not able to take any FX risks. So there's a need for the market or funds such as ours to absorb that FX risk. So these loans can be made in local currency. And then so very briefly, infrastructure equity, as we've mentioned before, is a fund where we're looking to launch this year. And which we're very excited about that and [indiscernible] this year, and that will then complete the whole product range. So that's why we view the product range for the foreseeable future and FX are very much making sure that the business is optimally structured behind these products. But with these products that we believe from a good basis for the business going forward and also for growth going forward. If we very briefly look at the next Slide, and just in terms of giving a bit of a background, in terms of the market opportunity here on this slide that we see on the left-hand side, the assets under management in the pension fund industry continue to grow as we feel that there's decision part due to an aging population, but there's also a lot of consolidation in the industry but [indiscernible] across our client base are reaching at a higher level. And just in terms of the service we offer that needs where there continues to be opportunities for us to do what we do well, which is best-in-class bespoke solutions for large institutional investors there. So there's a big opportunity set here for us to have these conversations. We're also slightly helped, as I said earlier, by the increased global, I'm not going to say tension, but certainly anticipation of changes globally. So that certainly is something that helps us, that has an effect on the currency market the way it's viewed, but also the way the world is viewed. And so anything where really opinions diverge, means we have opportunities to exist with implementation of what clients are looking for. Right-hand side shows just the last couple of years of growth in private markets and that is projected to continue. And then for us, that means that the second box on the product slide as described earlier hedging as a service to other asset managers continues to be something where really the client base is ongoingly increasing. But separately, then the other funds, which we are launching or have launched which includes [indiscernible] fund, the infrastructure fund or the credit fund are very much products that are also participating in this set of opportunities. So broadly, just with these 2 charts in mind, we're quite happy to have just a bit of tailwind on both sides of the business on the risk management and on the forward terms.

Just finishing on products, there's a couple of questions. There's a few questions who should get you by scanning through them. There's a couple of crypto service in recent years, the crypto, we had some crypto products that we're looking at most or some of the funds [indiscernible].

So I mean, if we go back to the product slide then so -- yes, crypto is not on that and so we discontinued our crypto efforts. Two things coming together really forward to -- as a basis for that decision. One is certainly that maybe a couple of years ago, there was a notion that the crypto was related to currency. And on that basis, we thought it was important to watch that space, but the bigger -- and then I think that has changed. I think in crypto is not really a thing of its own. But I think more importantly, if we look at the product ranges as a percentage here with where we are competing really. As I said at the beginning, our competitive advantage really centers on large matter. So anything we do is any -- our efforts should focus on large opportunities. And when we structure large investments and then also typically these are relatively large opportunities for us in terms of revenue. And so that puts the hurdle for us relatively high when we allow ourselves to do something new or anything that we add to the product range comes at the risk of distracting. It creates -- there's a complexity premium that we pay in the group structure in doing these things. And so just in light of those risks or disadvantages when we do new things, we've been very disciplined when we say there's an opportunity big enough for us to really feature on this as part of these set of products. And our decision was that crypto just didn't need that bar as in size of the opportunity for us. And I mean so we exit those -- we ended those efforts, but there was no cost, no cost of business in doing so.

Anything as you want to cover before we go on to some questions.

No. I think that sort of concludes everything I want to be very happy to go into the questions.

[Operator Instructions]

So the first question here is U.S. expansion and best strategies to avoid a client switching to pass it's mandates.

I think I part touched on it earlier, but the -- I mean the U.S. really for us is opportunity, and it's important to contrast that with Europe in that I mean, Europe hasn't exited from Brexit neither the U.K. more than you have benefited because that separated London as still the financial center from the rest of Europe. But also in the EU, selling into the EU is made additionally difficult by the separate jurisdictions for our countries even within that as a regulatory jurisdiction. So there's a need for example, funds, when funds sold into the EU to be passported in the different countries separately before they can be sold. Rest of the U.S. is very much 1 set of opportunities, 1 language, 1 culture. And so in that side, we're very confident with regards to the expansion, a, in the U.S. and secondly, it's important to remember we do have relatively large assets now in the U.S., and we are now quantity to a lot of the community there. So this is not something which we're starting, this is something which we are intensifying. And then just on the point of do we think there's a particular risk of client switching to asset mandates. Probably rather the contrary. I think as again, if we relied on how we see the world develop, there's probably a tendency, which we observed towards slightly more active [indiscernible].

I mean, the context of that question is, of course, our revenues this year and will be in the coming year because of one particular client switching their mandate. But I think it's right to say that these are long-term client relationships and changes in -- I mean, the approach of investment managements are not going to change over the life of those contracts.

Yes. I mean, [indiscernible] can always, of course, change what they do, and we will always support whatever client wants to do. But we've not had any other instances of that happening. And in this case, this is after a 2-decade relationship with that kind and so really the change of team on their board to different philosophy in terms of how to do things. So I don't think there's any data in terms of what might happen in other jurisdictions and with other clients.

Yes, I mean, what measures are in place to ensure a smooth transition and continuity in leadership, especially given the long tenures of previous key executives?

We are proud to now be in a position to have managed succession, not only the CEO and definite CFO succession as I've presented to you here today, but also across all other teams. So we now today have a team in place across the product range where almost everyone has another 10 or 15 years ahead of them in terms of what's typical career license. So we're in a position where we can commit to multi-decade relationships with clients in a way that's honest and legal. And we think that's very different from where the business was just a few years ago, where really -- we did have questions from clients, what happens when ultimately new steps out. What happens when ultimately [indiscernible]. So now we're in a position where we have completed that. I come into this job having previously been a global head of sales. So again, there's a lot of relationship with clients than and for me, also through the Board at -- at the current management. And there's now a lot of confidence on our side that not only do we have to have continuity for a long period of time to the future. It also changes how the business now looks for. So it gives the business at all levels are much longer -- much longer horizon and looking forward how we stand, how we think [indiscernible] in our ambitions. How will we manage that? I mean a big part of that is share ownership. That's one of the advantaged of being listed is we can ensure that all key individuals have shareholdings in the business to participate in that journey very much the same way our investors do.

I say that, I mean, the whole transition process, the succession process has been very actively managed and sort of quite publicly in terms of the externally with shareholders and investors, but also with clients and so on. And I mean I've come in, you've been here a long time, and lastly did remain big shareholders. The business has been very supportive of the transition as well. So it's been very active actively managed and it's hopefully done.

I think it's one of the benefits of being a listed company, so this is a big thing. So very deliberately planned and then also executed and it avoids some of the challenges that we see in private companies. I mean there's a lot of smaller companies with very much a CIO/CEO model where succession is something they just never happens and that's where we're proud to be in different position.

As part of the risk management products, what is the risk by the company?

We manage, I mean, I described earlier, we manage sophisticated operational processes. So ultimately, we -- what we do is we take operational risk in the services we deliver and our business to ensure that our operations are strong cutting edge to minimize any left over risks. We also ensure that the way we shut out any mandates with clients minimizes these risks and so again, this relates to the core of the business being systematic. So most of what we do is processed different from the point of data collection at the site of the client, where in most cases, we have access to custody accounts or even underlying portfolios without asset managers on the side of the client. So we access that data. And then from there, the data get processed on our side, gets translated into the necessary trading instructions and then some implementation follows. But it's really that process where we need to manage that process in an excellent fashion. And we do manage that process in an excellent fashion. But yes, that's at the core of what we do.

There's a few questions or questions on IT development. A few questions around bring that to your house, some of the things that are running now.