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Man Group – 05th May 2014

Company Overview:

Man Group (EMG) is one of the world’s largest hedge fund groups and is listed on the London Stock Exchange. The group is comprised of a number of different funds, each operating different strategies that are designed to produce performance across market cycles.

EMG is based in London, has offices in all major regions across the globe and employs a total of 1,115 employees worldwide. The group’s subsidiaries include Man Investments Limited, Man Investments AG, Man Investments (USA) LLC, Man Investments (CH) AG, GLG Partners LP, E D & F Man Limited and Man Investments Finance Limited.

Index FTSE 250 Ticker EMG.L Latest Close 97.47
52 Week High 136.00 52 Week Low 76.35 P/E 11.11
Dividend Yield % 3.39 Dividend Cover 2.51 CEO: Emmanuel Roman
CFO: Jonathan Sorrell

Strong Gains in Equity Indices Leaves Hedge Fund Universe under Pressure to Perform

As equity markets rallied to multi-year highs throughout 2013, the pressure to perform upon the hedge fund (HF) universe increased markedly as the industry headed toward a fifth year of returns that have lagged those of benchmark equity markets.

Given the high fees charged by the industry, hedge fund investors expect greater performance relative to the benchmark. If this is found to be lacking, the fund management groups can suffer from capital flight as investors withdraw their funds in order to pursue other opportunities, and in the case of Man Group, downward pressure upon the share price.

During 2013, most of the major developed nation indices achieved double digit returns for the period while, according to the Bloomberg Hedge funds Aggregate Index, the average HF returned just 7.4%. Man Group has been no exception to the trend of under performance in the industry as returns from all of its three fund vehicles lagged their benchmarks, more often than not, for a number of years

This has driven a multi-year exodus of capital from the group that has seen FUM fall by 17.4% since the close of 2011. To date Man Group has, at best, only managed to stem the outflows of funds during intervening periods of underperformance.

One of the hardest hit funds within Man Group during 2013, and a leading cause of past redemptions, has been the computer-driven AHL fund which has struggled to contend with the violent swings in equity, FX and fixed income markets over recent years.

As the group’s highest margin vehicle, redemptions from AHL have had a disproportionate impact upon Man Group’s operating profit, which has fallen by 81.1 % since 31 March 2011.

Man Group Share Price Chart

GLOBAL INDICES SINCE JULY 2012

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Man Group Posts a Q1 Profit, Aided by Modest Increase in FUM

While funds under management fell by 5% over 2013, Q1 2014 saw a modest improvement in funds under management for Man Group, with inflows of $2 billion managing to offset the impact of redemptions and trading losses. An adjusted profit of $297 million was also recorded, reflecting an increase of 8% upon the previous year.

Away from the realm of investment performance, EMG made notable progress toward efficiency targets over the period. A big contributor, the overall improvement was a change made to the group’s regulatory status with the FCA, which reduced its regulatory capital requirement by $550 million.

In addition to the above, increased capital efficiency and the return to profitability have enabled the group to repay all outstanding debt upon its balance sheet, fractionally reducing the overall risk profile of the shares.

Going forward, management have advised caution on the outlook for fund flows over the remainder of the year, given the negative investment performance which has persisted into the New Year.

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Man Group Going Forward

The group’s strategic objectives going forward continue to see improving investment performance as the number one priority which, in our view, is essential if management are to reverse the long term and persistent decline in EMG’s share price. This is while diversifying revenue through building upon existing growth options and efficiency initiatives also remains high on the agenda.

Ultimately, whether or not management will be able to sufficiently improve investment performance in time to prevent further capital flight, and a renewed depreciation in the EMG share price, remains to be seen. It is worthy of note that on this subject, much of the group’s focus and efforts to improve portfolio returns are currently skewed toward the AHL fund which, as a trend follower, is known to struggle in volatile markets.

Given our expectations for volatility to increase across financial markets over 2014 and beyond, the question remains open over whether or not management’s efforts are likely to prove sufficient.

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Dividend, Valuation

The group paid a total dividend of 3.19 pence for the 2013 year, which was covered 2.5 X over by earnings and equates to a yield of 3.39% based upon today’s share price.

From a valuation perspective, EMG currently trades on a multiple of 11.11 X 2013 earnings, which is low relative to the 20.92 X earnings of the FTSE 350 financial sector. It is also low compared with the averages of alternative sub-sectors such as Banks, Asset Managers and Equity Investment Instruments where earnings multiples remain in the high teens.

Although the present multiple is indisputably low, and leads the shares to appear cheap, our view is that it provides an accurate reflection of the risks attached to the group.

Although EMG faces multiple risks across the group, the most notable of these is that its investment vehicles continue to under perform. Should returns remain low relative to the market for a sustained period of time, then the impact could potentially be significant.

As with most other fund management businesses, EMG shares have an amplified exposure to investor sentiment. This is because market volatility often causes losses in the firm’s investment portfolios, which can then lead to both redemptions in FUM and downward pressure upon the group’s share price.

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Summary

The group has made efforts to reduce costs and increase shareholder value over 2013 and the opening to 2014. This is while improving the investment performance of its three funds remains the highest of priorities.

So far to date, management have made progress in reducing costs and becoming more efficient; however, the outlook for portfolio returns and fund flows remains uncertain.

It remains to be seen as to whether the actions that management have taken will be sufficient enough to improve performance and save FUM from further redemptions.

Although a complete turnaround in earnings and performance is likely to take some time, the group faces the risk of a further exodus of client capital over the near term should it prove unable to make further headway within a suitable time frame. At present, EMG shares have responded well to the net capital inflow of Q1 and now appear poised for further gains.

Despite this, our overall outlook for the group sees further upside in the shares as difficult to sustain, with gains likely to remain capped at 115.00 pence per share.

This is while our medium to longer term price target sees EMG trading toward the 70.00 pence level over the remainder of the current reporting cycle.

The next event of significance in the calendar for Man Group is the release of interim results on 5 August 2014.

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