Review of the Year

Operational Review

F&C Asset Management

F&C Asset Management plc is a listed company in which we hold a 52% shareholding. Alain Grisay is F&C's Chief Executive. Reproduced here are edited extracts from the F&C Chief Executive's Report. The full report and further information about F&C are contained in F&C's 2007 Report & Accounts available online at www.fandc.com

F&C Chief Executive's Report (extracts)

Last year I reported the launch of a three-year plan, focused on targeting specialist areas and higher margin products, to foster profitable organic growth. In spite of turbulent markets in the second half of the year and the corporate backdrop, I am pleased to report good overall progress in executing the first year of our plan.

The financial outcome for 2007 is slightly ahead of our plans, with underlying earnings per share of 10.4 pence and operating margin of 30.9%. Our average fee rate has continued to rise progressively from 21.6 basis points in 2006 to 22.5 in 2007 reflecting our focus on increasing revenue margins.

We recorded increased institutional inflows of £3.3 billion during the year. Having disclosed in January 2007 that we had received notification of institutional withdrawals during 2007 of £5.2 billion, final institutional outflows totalled £6.1 billion. Average fees on institutional inflows were higher than average fees lost on institutional outflows, reflecting the implementation of our strategy.

2007 was another record year for our UK retail funds business with £703 million of inflows into open ended funds. Our net sales rose 28%. Importantly, inflows were across a broad number of funds. We have excellent momentum in UK retail and have secured a number of new distribution agreements with adviser firms that should allow us to build sales further during 2008.

Investment performance was strong across a number of key products and asset classes during 2007, resulting in performance fees increasing by more than 100%. We out performed in core UK equities, UK high alpha, UK small cap, pan-European equities, emerging equities, global equities, UK credit, high yield bonds, emerging debt and convertibles. Performance was excellent in Asia ex Japan and emerging equities.

We under-performed in US, Japanese and Continental European equities and UK government bonds and global credit. Where necessary we have taken action to improve performance in these asset classes.

Socially Responsible Investment (SRI) funds under performed their unscreened sectors during 2007. However, our SRI funds remain positioned as market leaders against their ethically screened competitors and we expect to see ongoing strong demand for sustainable investments.

New product development was a key feature of 2007, particularly the first half of the year. We also continued work on our infrastructure platform. We successfully brought in-house the element of our operations that had previously been outsourced to Mellon and now have in place a single, integrated operational function that leaves us better placed to take on new business and ensure consistency of service. Likewise, we implemented a new front-office Decision, Risk and Dealing system to support the delivery of investment performance, particularly as we develop more sophisticated products.

We have made additional investments in human capital, following on from the substantial upgrades of our investment teams in 2006. Much of our recruitment in 2007 has been focused on the further development of our distribution capabilities to allow us to achieve increased inflows over the coming years. With strong performance, an enhanced product suite and additional hires in sales and business development, the focus of 2008 will be distribution.

Against this backdrop of good progress in executing the plan there are undoubtedly challenges ahead, not least from a deteriorating economic environment and volatile markets. We believe that our strategy of being a diversified business by asset class, client type and geography positions us well to weather the storm.

The F&C Board and management remain committed to the strategic direction set out in the plan and its focus on seeking organic growth opportunities in higher revenue margin and specialist product areas.

Performance

Overall, funds under management as at 31 December 2007 were £103.6bn, compared with £104.1bn at the end of 2006. During 2007 F&C experienced net outflows of £9.0bn.

Insurance: Net outflows of £5.0bn represented 56% of all net outflows during the year.

Institutional: Net outflows of £2.9bn reflected primarily inflows of £3.3bn and the pipeline of £5.2bn outflows highlighted by F&C in January 2007. New inflows were at higher fee rates than outflows.

Sub advisory: 2007 saw further net outflows of £1.3bn which substantially represented Portuguese retail investors moving out of money market funds and into banking products. Fee margins on these assets are substantially below F&C's average fee rate.

Investment Trusts: 2007 saw a successful roll-over of an existing trust and the launch of F&C Event Driven (a £75m fund of hedge funds). There were no investment trust mandate losses. A £346m net outflow of investment trust assets related to share buyback activity, reductions in gearing levels, and the natural wind-up of Investors Capital Trust of which 61% was rolled-over into a successor vehicle.

UK retail: 2007 was a record year for F&C with net retail sales up 28% and gross inflows of £703m. Flows were spread across a range of key products.

International wholesale: Net sales of mutual funds increased 109% to £111m, primarily reflecting a very significant reduction in the level of historic outflows.

Key Performance Indicators

Corporate health indicators

Out of sixteen – see note 1 below

Percentage of key institutional accounts exceeding client objectives

Funds under management

Underlying profit

Percentage of retail funds above median

Average basis points earned on funds under management

Operating margin

Underlying earnings per share

Additional information	2007 £bn	2006 £bn
Assets under management by client category
Insurance funds	58.9	59.0
Institutional funds	27.3	28.1
Sub-advisory	6.5	7.0
Investment trusts	6.6	6.5
UK retail (mutual funds)	3.3	3.0
International wholesale (mutual funds)	1.0	0.5