ADN Abdn.Asset.Man.

TIDMADN

RNS Number : 0946S

Aberdeen Asset Management PLC

16 December 2016

Aberdeen Asset Management PLC - Annual Financial Report

Aberdeen Asset Management PLC (the "Company") released its preliminary announcement of annual results for the year ended 30 September 2016 (the "Annual Results Announcement") on 28 November 2016. Further to the Annual Results Announcement, the Company confirms that the following documents have been published and are being mailed to shareholders today:

- Annual Report and Accounts for the year ended 30 September 2016 ("2016 Annual Report")

- Notice of Annual General Meeting

- Form of Proxy

The Annual General Meeting of the Company will be held at 12 noon on 2 February 2017 at The Marcliffe Hotel, North Deeside Road Aberdeen AB15 9YA.

In accordance with Listing Rule 9.6.1 a copy of each of these documents has been submitted to the National Storage Mechanism and will shortly be available for inspection at http://www.morningstar.co.uk/uk/NSM.

The 2016 Annual Report and the Notice of Annual General Meeting are also available on the Company's website at www.aberdeen-asset.com, and in hard copy on request to the Company Secretary, 10 Queen's Terrace, Aberdeen AB10 1YG.

The Company's full year results announcement of 28 November 2016 contained a chairman's statement as well as the audited financial statements which were prepared in accordance with the applicable accounting standards. The 2016 Annual Report submitted to the National Storage Mechanism today also contains information regarding the Company's principal risks and uncertainties, related party transactions and a responsibility statement relating to the content of the 2016 Annual Report; an extract of this information, where material, is provided below, as required under paragraph 6.3.5 of the DTR, however this material should be read in conjunction with and is not a substitute for reading the full 2016 Annual Report. Page numbers and cross-references in the following appendices refer to page numbers and cross-references in the 2016 Annual Report.

Principal risks and uncertainties

A description of the principal risks and uncertainties that the Company faces is extracted in full and unedited form from pages 42 to 49 of the 2016 Annual Report.

The Board believes that the risks and uncertainties described below, both those driven by delivering on our strategy and by external market forces, have the potential to have a significant impact on the long-term performance of the business.

We therefore continue to focus on mitigating these risks at all levels of the business.

Strategic and business risks

Strategic risks are those that arise from decisions taken by the Board and senior managers concerning our strategy. They relate to how we are positioned in the asset management industry as a whole, rather than just a particular part of the business.

Business risks materialise due to poor business implementation or a failure to respond appropriately to internal or external factors.

Investment process and underperformance - Risk profile: Unchanged

Risk description:

-- Prolonged and/or significant investment underperformance relative to that of peer funds, due to poor investment decisions or adverse economic or market conditions.

Potential impact:

A decrease in the demand for our products and client losses, which affect our ability to retain and grow AuM, as well as reducing revenues.

Mitigation response:

-- We adhere to disciplined investment processes, centred on team based decision making and first hand research.

   --     Investment decisions are based on the long term, which may occasionally lead to periods of underperformance. 

-- We are transparent with clients and our performance drivers are supported by relevant analysis of performance components.

-- We have a market risk team, which reviews and challenges investment risks across all asset classes, independently of our fund managers.

-- We aim to control inflows, where necessary, to avoid dilution in the quality of the portfolios. For example, we retain an initial charge

-- on our UK and Luxembourg global emerging market funds strategies (for the benefit of the fund).

Trend and outlook:

As outlined in the market review we are currently operating in an environment dominated by macro themes including government and central bank policies. Investment markets are inherently cyclical and different asset classes perform well at different times. Our key response to the challenges we face is to become a full-service asset manager with the breadth and depth of capabilities across active and passive, multi asset and alternative investments to serve all investor audiences. Regulators are increasingly focused on the role played by asset managers with respect to liquidity which has implications for our portfolio management and risk management.

Pricing pressure - Risk profile: Increased

Risk description:

-- Pressure on fees charged to clients for fund management services, as a result of growing competition within the industry; including the impact of (a) the growth of lower cost passive and ETF funds and (b) greater competition among active managers, which account for a smaller percentage of total global AuM due to the growth in allocation to passive managers. In addition regulation has and may continue to encourage the move towards lower cost products.

Potential impact:

Our revenues are principally generated by the management fees we charge based on the level of AuM managed on behalf of clients. Pricing pressure may result in fee reductions which can lead to a decline in our revenues, operating margin and profitability.

Mitigation response:

-- Our management fees vary depending on the investment strategy selected and we have built up a good reputation and brand which enables us to remain robust in terms of our pricing.

-- At the more expensive end of the spectrum, our active emerging market product remains attractive to clients, as passive investing is generally less attractive in this market.

-- We also expanded our multi asset, alternatives and quantitative investment range, notably through our diversified growth strategies, which are currently building a good track record and have strong investment consultant support.

Trend and outlook:

The trends discussed in the market review section on pages 14 to 16 provides more detail on the changing needs of clients and active vs passive investment and how we are responding to these developments.

Distribution and client management - Risk profile: Unchanged

Risk description:

-- Failure to respond to fundamental changes in distribution patterns; embrace new channels; or customise our service models to meet the changing profile and demands of clients.

   --     Poor management of client or distributor relationships. 

Potential impact:

Inability to capture flows, grow assets and protect margins.

Mitigation response:

-- We have a global network of offices and dedicated client relations and product specialists teams focused on local client relationships, sales and capabilities.

-- Our investor protection committee, pricing committee, and conflicts of interest committees are part of our internal governance structure to oversee client interests.

-- The compliance team ensures client marketing materials are consistent with products and capabilities.

-- The re-structured Aberdeen solutions team will work with all investment divisions and distribution to provide bespoke client solutions and strategic research, which will enable us to meet the growing demand for outcome driven propositions.

-- Our investment in digital technology, together with the existing fundamental strengths of our global platform and wide range of investment capabilities will create deeper relationships with clients and intermediaries within their target market segments and develop a more focused and productive dialogue based on client needs.

Trend and outlook:

The changing profile and demands of clients is a trend which will continue to have a significant impact on our business model. As the buyers of asset management services increasingly shift from institutions to individuals we need to be able to respond to the demands for immediacy, simplicity, transparency and personalisation. How we adopt and adapt our digital strategies will increasingly determine the success of our distribution reach.

Product risk - Risk profile: Unchanged

Risk description:

   --   Misleading or misrepresenting products to clients due to poor product design or complexity. 
   --   Products are not managed in accordance with stated investment policy and objectives. 

Potential impact:

Inability to capture flows, grow assets and potential regulatory censure and loss of business.

Mitigation response:

-- We have a centralised product development team which oversees the assessment and launch of all new products across the Group.

-- New fund proposals and strategies are evaluated and approved by the product development committee, which considers the risks, potential investor profiles and distribution channels to ensure suitability and commercial viability. Subsidiary boards are in place for management companies for the fund ranges.

-- Our product specialist distribution team prioritises matching our investment strengths to client demand, so that our focus is aligned and we can capitalise on the opportunities available. Collaboration between business development and investment teams helps to identify new investment solutions to meet client needs.

-- Ongoing product analysis is undertaken to confirm products are performing as expected and meeting the needs of our clients.

Trend and outlook:

Product risk continues to be an important area of focus for the regulator.

Loss of key personnel - Risk profile: Increased

Risk description:

   --     Inability to attract and prevent the departure of high calibre employees. 
   --     Poor management of succession planning, talent and performance. 
   --     The potential to misalign employee rewards with clients' and shareholders' interests. 

Potential impact:

Our reputation and ability to retain clients may be damaged if there are significant changes in personnel. The potential for the biggest immediate loss of revenue is from departures of senior investment staff.

Mitigation response:

-- We do not advocate star fund managers; we have teams with complementary skill sets who discuss investment decisions and take collective responsibility. This team based approach seeks to avoid reliance on any one individual.

-- There is a strong development programme for fund managers and we seek to encourage performance and loyalty through appropriate remuneration and benefits packages, which include a significant deferred element.

-- Succession plans are in place to ensure there is cover for key roles, and these are formally reviewed and updated annually.

-- The global diversity & inclusion committee focuses on improving our diversity and inclusion programme with senior level sponsorship and governance and active participation from business areas.

Trend and outlook:

We are responding to the changing external environment with new business strategies, the implementation of which is bringing a significant amount of organisational change. The pace, coupled with the associated uncertainty, may lead to low morale, or cause experienced employees to leave and prospective employees not to join.

The bonus pool has been reduced in 2016 due to lower profitability. As we explain in the people section, we have increased the effort on internal communications and staff engagement and in recent years we have significantly upgraded training to aid employee development.

Technology and digital innovation - Risk profile: Increased

Risk description:

-- Inability to keep pace with the software and infrastructure investment requirements and remain competitive in the market.

Potential impact:

Prolonged underinvestment in technology advancements will lead to a lack of corporate agility and affect our ability to successfully compete with new fintech firms. It may also affect our ability to adequately serve our clients and meet their needs.

Mitigation response

-- The design and development of our operating model is performed in line with our business strategy.

-- Analysing the role of information technology is essential to our efforts to implement new business strategies and reduce costs. We are executing a strategy using platforms that allow for globalisation and scale.

-- The creation of a digital division, which incorporates Parmenion, allows us to develop our plans to use technology as a means of capturing a broader base of clients.

Trend and outlook

This risk is likely to increase and is high profile due to the advancements in technology within the asset management industry.

Brand & reputation - Risk profile: Unchanged

Risk description:

-- Damage to our reputation if we do not keep pace with how increasing numbers of clients and stakeholders want, and expect, to interact with us.

   --     Brand or marketing activities are inconsistent with our culture or operations. 

Potential impact:

Any damage to the brand caused by a single event, or series of events, could materially impact the willingness of customers to invest with us leading to a decline in AuM and revenue and / or litigation.

Mitigation response:

   --     We regularly monitor customer satisfaction through research and development of our products. 
   --     We also allocate resources to build our brand and protect our reputation. 

-- A dedicated marketing team oversees all social media communications, to ensure we detect emerging trends at an early stage and develop our digital offering to help us communicate with client audiences in an engaging way.

-- We track reputational change through a specialist company which analyses industry, media and social commentary to help us to understand what is influencing our reputation, how we compare to our peers, and the way our reputation is evolving.

Trend and outlook:

Press scrutiny, regulatory change and the impact of macro economics events means that the spotlight on the asset management industry is set to continue.

Acquisition risk - Risk profile: Decreased

Risk description:

-- Aberdeen has grown some parts of its business by acquisition, seeking earnings accretive transactions that add investment capabilities and new distribution channels. However, they add integration risk and the potential for discovery of unknown issues.

-- Acquisitions can change the culture and may lead to increased levels of stress as a result of the employees and resources required to integrate a new business or implement new processes.

Potential impact

A negative impact on operations, effectiveness and cost.

Mitigation response

-- Acquisitions are only considered when they fit with the Group's strategic objectives. A robust due diligence process is undertaken, which includes a careful analysis of all strategic, financial, operational, and technological requirements before any acquisition is made, including our ability to integrate successfully the acquired business. The due diligence process also includes a cultural assessment to establish areas of similarity and difference which may impact integration efforts and the achievement of strategic objectives.

-- Strong project governance is also in place to manage the scale, scope and change management implications of acquisitions.

-- We have built a track record of partnering with our outsourcers and we have teams across the business who are skilled at managing transformation projects while continuing to provide a strong business-as-usual platform.

Trend and outlook

The Group's last major acquisition was SWIP in 2014 and the integration process is complete.

We believe that external challenges and opportunities in the market will likely result in further consolidation in the sector.

Brexit - Risk profile: Increased

Risk description:

On Thursday 23 June 2016 the people of the United Kingdom (UK) voted to leave the European Union (EU).

Potential impact

Following the result of the UK's referendum on membership of the EU, nothing about our relationship with Europe has changed. Until the negotiation begins formally, expected by the end of March 2017, the terms of the withdrawal and any impact will be largely unknown. However, it remains to be determined on what basis we will be able to provide investment management services from teams in the UK to EU member states.

Mitigation response:

-- Currently, we operate in over 26 countries around the world and are experienced at adjusting our business worldwide to service our clients' needs.

   --     We operate in a number of countries across Europe through locally regulated subsidiaries. 

-- Our principal cross-border fund range for European investors outside the UK has been domiciled in Luxembourg for many years and we do not expect this to be affected in a substantive way by the result of the referendum, although there may be regulatory and/or legal changes in the long term.

-- We have set up a Brexit working group and are liaising closely with a number of organisations, including the UK Investment Association, the Corporation of London and Scottish Financial Enterprise, to ensure we are involved in helping to shape developments. Our Chief Executive has also joined the European Financial Services Chairmen's Advisory Committee led by Baroness Vadera, which has been created to advise the UK Government on financial services during the Brexit negotiation.

-- Beyond the fund range, the core issue is how we will be able to provide our investment management skills from the UK into the EU market - whether through the benefit of passporting, acceptance that the UK forms an 'equivalent' regime or through co-operation agreements with member states.

Trend and outlook:

As set out above, until the negotiation begins formally the terms of the withdrawal and any impact will be largely unknown. We are confident that we will be able to meet any challenges and opportunities which leaving the EU may present.

Operational risks

Operational risk is the risk of loss resulting from inadequate or failed internal processes, systems, human factors or due to external events. Operational risk can manifest itself in various ways, including business interruptions, inappropriate behaviour of employees (including fraud), failure to comply with applicable laws and regulations or failure of vendors to perform in accordance with their contractual arrangements. These events could result in financial losses, litigation and regulatory fines, as well as other damages to the Group.

Internal process failure - Risk profile: Unchanged

Risk description:

-- Failure or poor execution of significant operational processes, including client mandate or exposure limits.

Potential impact:

Compensation for operational risk events including breach of investment mandate and trade errors, damage to our reputation and the potential for a decline in future cash flows and capital.

Mitigation response

   --     We operate a three lines of defence risk management model, as set out on page 41. 

-- Client and investment mandate restrictions are automated as much as possible to reduce areas where judgement or manual intervention is required. Timely and accurate monitoring of restrictions is also facilitated through our compliance monitoring system and there is segregation of duties between all conflicting roles.

-- We continue to invest in our system capabilities and business processes to comply with regulatory, legal and financial requirements, meet the expectations of our customers, and mitigate the risks of loss or reputational damage from operational risk events.

Trend and outlook

In recent years, the implementation of acquisitions, significant projects and new initiatives to support strategy has inherently increased the profile of operational risks across the Group. However, in 2016 there were no large scale acquisitions and therefore the risk of internal process failure remained unchanged.

Legal, regulatory and conduct - Risk profile: Unchanged

Risk description:

-- Failure to correctly interpret and implement applicable laws and regulations or take on a legal or regulatory obligation that we did not intend to assume.

-- Poor judgement or behaviour of employees in the execution of our business activities and processes.

Potential impact:

Regulatory censure and related negative publicity could damage the market and clients' confidence in us and affect our ability to generate new inflows. Poor conduct could also have a negative effect on customer outcomes, impacting the ability of the Group to achieve its strategic objectives.

Mitigation response

-- The Group is subject to regulatory oversight and inspection by the FCA and other international regulators.

-- The management of legal and regulatory risk is the responsibility of the senior management of all functions, supported by the in-house legal and compliance teams.

-- The legal and compliance teams track legal and regulatory developments to ensure the Group is prepared for both global and local changes. In addition to developing policies, delivering training and performing monitoring checks, they provide advice to other divisions to ensure compliance with legal and regulatory requirements. They also work with project groups to implement key regulatory changes.

-- We foster an open and constructive relationship with our regulators and participate in industry forums and associations so that we are informed about, and involved in, potential changes.

-- We are adopting a more proactive and integrated approach to legal and regulatory change to identify cross overs and achieve efficiencies. We also want to coordinate our efforts on fund development, maintenance and distribution matters more effectively.

Trend and outlook

Aberdeen operates in a complex and dynamic regulatory environment. Ongoing areas of regulatory change include the senior management regime, MiFID II, market abuse regulation, proposed new capital regime, conduct, governance and cyber security. In the US, the Department of Labour requirements will impact access to retail intermediaries.

Beyond the fund range, the core issue is how we will be able to provide our investment management skills from the UK into the EU market - whether through the benefit of passporting, acceptance that the UK forms an 'equivalent' regime or through co-operation agreements with member states.

External service providers - Risk profile: Unchanged

Risk description:

   --     Failure of a key supplier to deliver contractual obligations and significant processes. 
   --     Poor due diligence of third party relationships and services, initial and ongoing. 

Potential impact:

Operational losses and negative publicity may impact clients' confidence in the Group.

Mitigation response:

-- We rely on a small number of strategic suppliers to carry out business functions, including certain back office administrative functions. This provides a degree of competition, whilst ensuring that we have significant influence and leverage.

-- We have teams responsible for the oversight of third party administrators. They monitor agreed service levels through a suite of key indicators, focusing on significant aspects such as service quality and risks so we are aware of the potential disruption. We also regularly review the business recovery infrastructure and strategy of these suppliers.

-- We continue to enhance our oversight of external service providers ensuring they receive a level of scrutiny that reflects their potential risk to our business. Areas we consider high focus include client money processes and internal risk governance process. This gives us the assurance that they meet our required standard.

Trend and outlook:

External service provider risk remains unchanged from the previous year.

Business continuity and resilience - Risk profile: Unchanged

Risk description:

-- Inability to identify the threats and potential impacts to the Group, and build the resilience and capability required to provide an effective response that safeguards the interests of key stakeholders, reputation, brand and value creating activities.

Potential impact:

A business continuity failure could make it difficult, or even impossible, to carry out our normal day-to-day activities, impacting our ability to service our clients and fulfil regulatory requirements.

Mitigation response

-- We have continuity and business resumption policies and plans in place, which define the standards and testing requirements for business continuity, pandemic preparedness, crisis management and recovery of all of our key activities. Our wide network of offices globally also provides us with the resilience and security that key operations can be moved and/or managed from one location to another at short notice if necessary.

-- We support remote working, including key system access for employees if they cannot travel to our offices. If our normal business systems or premises become unavailable, we have alternative back-up premises for our key offices.

-- We have an obligation to ensure the business can operate at all times. We have developed and implemented an Aberdeen On The Go mobile application that provides quick access to staff contacts, office and business continuity information while on the road or outside office hours.

-- We also continue to work with our third-party service providers to understand the full spectrum of business continuity risks, including cyber security, to improve resiliency.

Trend and outlook:

Business continuity and resiliency risk remains unchanged from the previous year.

Technology and information security - Risk profile: Increased

Risk description:

-- Inadequate technology security systems or data held insecurely resulting in unauthorised access.

-- Flaws in our hardware, software or processes could expose a system to be compromised by third parties.

Potential impact:

A breach of information security could expose the Group to significant damage to our reputation and financial loss.

Mitigation response

-- The information security and business continuity committee provides the overall strategic direction, framework and policies for technology and information security, with a particular focus on cyber-crime prevention. This is supported by Aberdeen's global cyber security programme which is focused on the protection of the confidentiality and integrity of our information assets.

-- We employ an external global capability to support the management and protection of our network, critical internal assets and data. This includes an incident response service in real time as they occur to identify and thwart potential malicious activity.

-- We recently concluded a security simulation to help test and develop defence planning. To mitigate risks, a large-scale programme to improve user access controls is in progress. This includes the implementation of a staff education programme on information protection focusing on phishing attacks, safety at home, physical security, password protection, and social media best practices.

-- We are devoting increasingly significant resources to maintaining and updating systems and processes designed to protect the security of our assets.

Trend and outlook

With the advancements of technology within the industry and business in general, security risk relating to human error, malicious intent, and compliance regulations is increasing.

Financial and capital risks

Financial and capital risks arise from movements in the financial markets in which we operate and inefficient management of capital resources.

Credit risk - Risk profile: Unchanged

Risk description:

-- Inability of a client or counterparty to a financial instrument to pay in full amounts when due. The principal risks are in respect of deposits placed with banks. Fund managers do not bear credit or liquidity risk on the client assets that they manage - all client business is undertaken as agent and client assets are held by an independent custodian.

-- For Aberdeen, credit risk principally arises from a few areas: trade and other receivables (i.e. collection management and to a much lesser extent performance fees) due from clients; cash balances on deposits in banks; and investments.

Potential impact

Negative impact on the Group's financial position.

Mitigation response

-- We monitor the value of deposits with our counterparties against limits in our treasury policy. As our cash balances have grown, we have increased the number of counterparties with which we deposit our cash.

-- The treasury function is supported by the front office credit team, as well as the market risk function that perform internal credit reviews.

   --   Where appropriate, we extend our assessment of counterparty risk to include major suppliers. 

-- We set capital aside for seed capital investments in response to the risk of movements in valuations in stressed conditions or our ability (whether through credit or liquidity stresses) to recover the value of the investments.

Trend and outlook

Credit risk remains low and it is unchanged from the previous year. The value invested in seed capital has increased in recent years as we commit to the longer-term development of a broader range of investment products.

Liquidity risk - Risk profile: Unchanged

Risk description:

-- Insufficient liquidity to meet Group liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking reputational damage to the Group's reputation.

Potential impact

Damage to reputation from inability to pay suppliers or staff and breach of regulatory capital requirements.

Mitigation response

-- The Group, and its regulated subsidiaries, must maintain significant balance sheet capital and liquidity to be able to ensure the provision of a continuous service to its clients and investors in Aberdeen managed funds.

-- Our approach to managing liquidity is to ensure, to the best of our ability, that we will always have sufficient liquidity to meet our liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking reputational damage. Our cash position, available facilities and forecast cash flows are monitored by the Group's treasury function. This applies to all regulated subsidiaries.

-- We prepare long-term forecasts and use stress tests to assess the Group's future liquidity, as well as compliance with regulatory capital.

-- The cash and funding position of each subsidiary is monitored and each entity has access to appropriate liquidity.

Trend and outlook

During the year, the Group's regulatory capital requirements increased. We remain well capitalised with sufficient head room over the higher requirement.

Market risk - Risk profile: Increased

Risk description:

-- Changes in market prices, such as foreign exchange rates, interest rates and equity prices could affect the Group's income or the value of its holdings of financial instruments.

Potential impact

Negative impact on the Group's financial position.

Mitigation response

-- The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. For example, the revaluations of overseas results or balance sheet items in currencies other than sterling impact financial performance or financial position.

-- 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.

-- Variations in the sterling value of operating costs and interest costs will, to an extent, offset any similar impact of fluctuating exchange rates on revenues.

-- The treasury function prepares a sensitivity analysis of the effect of changes in rates. Further details on sensitivity to changes in currencies are set out in note 28 of the financial statements.

Trend and outlook

Significant events, such as Brexit, may increase the levels of general market and foreign currency volatility. During 2016, the balance sheet was strengthened through translation of balances denominated in currencies other than sterling.

Directors' statement of responsibilities

The following statement is repeated here solely for the purpose of complying with DTR 6.3.5. This statement relates to and is extracted from page 160 of the 2016 Annual Report and signed on behalf of the Board of Directors by Simon Troughton, Chairman and Bill Rattray, Finance Director. Responsibility is for the full 2016 Annual Report and not the extracted information presented in this announcement or the full year results announcement.

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 annual report and financial statements, taken as a whole, provides the information necessary to assess the Company's position and performance, business model and strategy and is fair, balanced and understandable; and

-- the Strategic 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.

For and on behalf of the Board

S R V Troughton - Chairman, W J Rattray - Finance Director

For further information, please contact:

Maitland

   Neil Bennett         + 44 (0) 207 379 5151 

This information is provided by RNS

The company news service from the London Stock Exchange

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December 16, 2016 06:45 ET (11:45 GMT)