The UK wealth and investment manager saw its profitability shrink as it continued to separate from London-listed Old Mutual.

Old Mutual Wealth reported an adjusted operating profit of £104 million ($135 million) for the first half of 2016, 31 per cent lower than a year earlier, attributing the decline to operational challenges and tough markets.

It incurred one-off charges of £21 million from changes to the fee structure in its Heritage book of business, including a 1 per cent cap on Heritage pensions exit charges for customers aged over 55 years.

Still, net client cash flows increased 39 per cent year-on-year to £3.2 billion and funds under management grew 7 per cent during the six months to £111.2 billion. The company’s discretionary investment management business, Quilter Cheviot, logged inflows of £400 million, in line with those of the corresponding period of 2015. Its funds under management increased by 7 per cent from the start of the 2016 to £19 billion. Quilter Cheviot's operating profit pre-tax rose 41 per cent year-on-year to £24 million

Meanwhile, Old Mutual Wealth’s asset management arm, Old Mutual Global Investors, generated inflows of £1.6 billion, up from £1 billion in the first half of last year, boosting its funds under management to £27 billion at the end of June, up 9 per cent from the start of the year. The unit, however, saw its operating profit pre-tax fall 17 per cent year-on-year to £25 million.

“This has been a challenging six months for Old Mutual Wealth, and the whole industry, with volatile markets dominating the first half of this year, indeed it was the worst period for net retail flows for the industry in 20 years,” said Paul Feeney, chief executive of Old Mutual Wealth.

“We expect markets will continue to be challenging as details of the UK’s exit from the EU are worked through and until investor confidence starts to return. However, I am confident that by remaining focused on meeting our customer needs, delivering our strategy and developing our structure and capabilities, we will continue to make good progress in the run up to the eventual separation from Old Mutual plc.”

The separation of Old Mutual Wealth from its parent company, Old Mutual, is expected to complete by the end of 2018. Earlier this week, the Old Mutual announced plans to sell Old Mutual Wealth Italy to ERGO Italia, owned by Cinven, for €278 million cash, plus interest to completion.