OREANDA-NEWS. Adjusted for certain non-cash and non-recurring items, the Group's underlying pre-tax profit for 2014 was CHF 216.7 million, 7% lower than in 2013. A decline in performance fees was partly offset by cost reductions.

Operating income totalled CHF 623.5 million (down 7% year-on-year), mainly due to the fluctuation in performance fees. Net management fees and commissions, which represent around 85% of the Group's overall operating income, held up well, with a 2% decline attributable to a shift in the asset mix towards a greater share of directional equity and fixed income products.

Underlying net profit for 2014 fell 16% year-on-year to CHF 177.2 million - a more pronounced decrease than on a pre-tax basis. It reflects a more normalised tax rate from the exceptionally low levels of 2013, when the Group benefited from the release of tax accruals and tax deductions from share-based payments.

Basic earnings per share were CHF 1.07 and declined less than underlying net profit (by 15%), due to the reduction in the number of shares outstanding through the Group's on-going share buy-backs.

Operating expenses, at CHF 406.8 million, were also reduced by 7%, in line with operating income, demonstrating the Group's flexible cost base. Personnel expenses fell by 9%, largely driven by lower contractual and discretionary bonus payments, a significant decline in the social security expenses for share-based payments and also lower severance payments. Non-recurring credits relating to expenses booked in prior years as well as lower consulting fees led to a 3% reduction in general expenses.

The Group's cost/income ratio was unchanged from 2013 at 65.2%.

Alexander S. Friedman, Group CEO, said: "Overall, 2014 demonstrated that our business model is working. At a time when active investment management faced fundamental challenges at an industry level, our unique business mix served to effectively ensure profit resilience and asset growth."

Investment management assets and flows

Assets under management in investment management at year-end 2014 were CHF 76.1 billion, compared with CHF 69.8 billion a year earlier. The 9% increase was driven by robust net new money inflows, the strengthening of the US dollar against the Group's Swiss franc reporting currency in the second half of 2014, as well as a positive impact from market performance.

Net new money inflows of CHF 2.4 billion were reflective of healthy underlying business momentum across the year, signalling a return to growth after the net outflows of CHF 2.6 billion recorded in 2013. While net new money results for 2014 include assets of CHF 361 million acquired with US-based mortgage-backed specialist Singleterry Mansley Asset Management in June, they were predominantly driven by broad-based inflows across the Group's existing product range and franchise. Particularly strong contributions came from specialised fixed income strategies, strongly performing directional equity funds and long/short equity strategies, which were the fastest growing product category in the Group's absolute return offering.

These positive flows more than compensated for cyclical redemptions in concentrated areas, partly due to market sentiment (physical gold ETF, local emerging bond strategy). Due to temporary performance headwinds, the Group's large unconstrained / absolute return bond strategy experienced outflows from the financial intermediaries channel, a segment that is very susceptible to performance fluctuations. With its 10-year track record of capital protection and solid returns across market cycles, however, the unconstrained / absolute bond strategy continued to win substantial inflows from institutional investors particularly in the US and Australia.

Private labelling assets and flows

Assets under management in private labelling (which represents approximately 7% of the Group's revenues) stood at CHF 47.1 billion on 31 December 2014, up from CHF 44.6 billion a year earlier. This development was driven by the positive impact of market performance and foreign exchange movements, more than offsetting net new money outflows of CHF 0.8 billion. Redemptions from clients of the Group's private labelling partners as well as the closure of certain partnerships could not be compensated by new mandate wins and the expansion of existing relationships.

Dividend and capital management

Subject to shareholders' approval at the upcoming Annual General Meeting (AGM) on 30 April 2015, the Board of Directors plans to pay a dividend of CHF 0.65 per share for the 2014 financial year, unchanged from the previous year. This will represent a nominal pay-out of approximately 60% of the Group's 2014 underlying net profit. The dividend will again be paid from capital contribution reserves and will therefore be exempt from Swiss withholding tax.

In addition to the proposed dividend payment, in 2014 the Group returned CHF 53 million of cash and capital to its shareholders through the buy-back of 3.27 million of its own shares for cancellation. Of these, 1.23 million shares were repurchased as part of its former buy-back scheme, which expired in April 2014, and 2.04 million shares as part of its current programme, which started on 28 April 2014. This programme allows for the repurchase of up to 16.7 million shares over a maximum period of three years.

The Group's balance sheet continues to be highly liquid (cash and cash equivalents of CHF 643.9 million at year-end 2014) and strongly capitalised (tangible equity of CHF 540.6 million), and we have no financial debt. The strong cash flow generation of the Group's operating activities, combined with low capital consumption, forms a solid basis for a continued policy of shareholder distributions. At the same time, it provides the Group with good strategic flexibility.

Mid-term growth initiatives

The Group has undertaken a focused growth agenda for the coming years. It builds on today's strengths and addresses attractive secular industry opportunities through the following initiatives:

  • Balance geographic and product footprint: From its strong presence in the UK and Continental Europe, GAM Holding will expand its investment and distribution footprint in the US, the world's largest pool of institutional assets, and in Asia, where wealth creation will continue to support industry growth. Investments in organic growth will be complemented by distribution partnerships and focused acquisitions, targeted at balancing the Group's geographic reach and its investment capabilities, adding competencies in areas such as equities, multi-asset solutions, credit and distressed assets as well as other alternative solutions.
  • Leverage DNA as leading alternative / absolute return investors: In an industry increasingly bifurcated between low-cost passive products and highly active, absolute return / alternative strategies and solutions, GAM Holding will focus on the latter. Building on its successful track record - demonstrated also by its position as the number two provider of alternative UCITS globally - the Group will continue to broaden its range of alternative / absolute return strategies, offering them in the form of onshore funds or as customised solutions.
  • Capitalise on and expand existing multi-asset class capabilities: The current environment of low yields and divergent monetary policy increases the need for 'outsourced Chief Investment Officer solutions', designed to help pension funds, high-net-worth individuals, family offices, charities, endowments and their financial advisers in making complex allocation and investment decisions across asset classes. With 30-plus years of experience, the Group already manages approximately CHF 12.5 billion in traditional multi-asset class portfolios and CHF 5.2 billion in alternative investments solutions. In order to build a cohesive offering and increase its market penetration, it is now pooling its multi-asset class capabilities and strengthening the investment process and will invest further in this area. Over time, the current relative return, absolute return and risk-rated offerings will be complemented by income solutions, all of them using a variety of instruments ranging from single securities to funds, including third-party products and passive instruments.
  • Enhance operating leverage: GAM Holding will complement its growth efforts with a search for greater efficiency. By eliminating internal complexity, the Group will maintain a strong grip on costs and over time enhance the operating leverage of its strategic initiatives. In the near term, it will focus on the following areas:

    Simplification of the brand architecture: In the coming months, the Group will discontinue the use of the Swiss & Global Asset Management name. Instead it will strengthen GAM as the Group's sole master brand and focus on positioning the two product brands - GAM and Julius Baer Funds - which have complementary strengths in different markets and client segments. A more straightforward approach to branding will be accompanied by intensified content marketing activities.

    Optimisation of operating model: With the establishment of centralised leadership over its company-wide operations function, the Group has started to analyse the entire operations and technology ecosystem supporting its investment capabilities and product offering. The objective of this effort is to achieve greater consistency and efficiency across processes and systems without sacrificing scope and diversification.

    Product lifecycle management: Over the past five years, the Group has successfully diversified its product offering towards a broad range of high-growth and higher margin segments. The constant drive for innovation and expansion, and hence a growing seeding pipeline, require a structured and disciplined management of the product shelf, including focused support for growth areas and the repositioning of products with low prospects for future growth.

Mid-term financial targets

Over a business cycle, the Group will aim to achieve the following targets (all calculated on the basis of underlying net profit):

  • Grow profitability in a sustainable fashion, measured by annualised growth in basic earnings per share in excess of 10%
  • Build a business that is robust and resilient across a variety of market conditions and cycles, by constantly improving efficiency and operating leverage, expressed by a cost/income ratio of 60 to 65%.

Net new money growth is one of the key drivers of profitability and operating leverage, and is therefore reflected in the mid-term targets above. For this reason, the Group has decided no longer to include a specific quantitative target for annualised net new money growth (previously set at 5 to 10% in investment management and 5% in private labelling).

About GAM Holding AG

GAM Holding AG is an independent, pure-play asset management group with a focus on active investing. With global distribution networks and investment teams based in five investment centres in Europe, the US and Asia, it delivers investment solutions to institutions, intermediaries and private clients through two leading brands - Julius Baer Funds and GAM. The Group's investment management business is complemented by a private labelling unit, which provides outsourcing solutions for third parties.

Headquartered in Zurich, GAM Holding AG is listed on the SIX Swiss Exchange and is a component of the Swiss Market Index Mid (SMIM) with the symbol "GAM". The Group has assets under management of CHF 123.2 billion (as at 31 December 2014) and employs over 1,000 staff in 11 countries.