Man Group

Man Group Plc (LON:EMG) reported Q1 closing FUM $2.2bn lower at $54.8bn, slightly below estimates as net outflows increased to -$3.7bn in Q1 (Q4 12: -$2.7bn). Lower gross sales than recent quarters at $2.5bn were offset by higher gross redemptions at -$6.2bn. Despite better performance across the product range. Man Group Plc (LON:EMG) management remains cautious on flows noting that AHL could need a prolonged period of better performance before flows improve. Top value hedge fund recently took a large stake in Man Group, however, this topic was not discussed by management. Other public hedge funds have shown mixed results this quarter.

Summary of Man Group Q1

The risk-on, risk-off pattern we have seen over recent years has given way to markets characterized by reduced correlation between major asset classes, and more importantly, the reassertion of trends. Against this background Man Group saw good performance across the hedge fund’s three investment engines.

AHL and GLG funds

AHL Diversified, Man Group’s flagship [quant] fund was up 10.4% to April 29. $9.5b of AHL open-ended funds under management are 4.5% away from high water mark on a weighted average basis, with over 70% at or within 5% of high water mark.

The majority of GLG alternative funds delivered positive performance in the quarter and over 71% of performance fee eligible FUM were above high water mark at the end of March and 20% were within 5% of high water mark.

GLG long only strategies did well, contributing positive investment movement of $1.6b in the quarter, with the strongest performance coming from the Japan Core Alpha fund which was up 24%. FRM delivered solid performance with FRM diversified II up 3% in the quarter.

Management indicated that market conditions in Japan a r e “much better” than one year ago, according to the company, as a result of monetary easing. Europe remains “very slow”, and while Scandinavia, Holland and the UK are performing well, France, Italy and Spain remain challenging. The US “seems fine,” although Man Group is underweight distribution in the US.

Man Group Flows and Sales

The good across the board performance which resulted in positive investment movement of $2.8b in the quarter.

Clearly, disappointing by contrast was the picture for asset flow where Man Group saw another poor quarter with net outflows of $3.7b. Sales of $2.5b were at a similar level to the previous quarter, both in terms of mix and the absolute level of sales. Redemption totaled $6.2b an increase of $0.9b compared to the previous quarter.

Guaranteed product and AHL open-ended redemption were slightly lower than Q4. GLG open ended redemption were concentrated in emerging markets where there were changes made to the team at the beginning of the year, and in global equity strategies where a large institutional client redeemed.

Institutional fund on fund redemptions were $1.5b but included $900m of redemption from managed account mandates where the margin is around 50 basis points. Long only redemption were $1.9b and included $700m from two institutional mandates in Japan Core Alpha, $400m from the MSS Europe Plus and $400m from other long only strategies.

Overall funds under management fell to $54.8b at the end of the quarter from $57b at the end of last year. This reflects not just the net outflow but also negative currency movements of $1.6b, driven by the strengthening of the US dollar against the yen, euro and sterling. This negative movement was partly offset by $2.8b of investment movement and a positive performance with [asset] re-gearing of guaranteed products and other movement of $300m.

Capital

one of the highlights of the quarter was the change in regulatory status from being a full scope group to a limited license group, which led to an increase in  surplus regulatory capital of up to $550m. The increase in surplus capital provides us with extra flexibility and is clearly to the benefit of shareholders.

On the conference call Man Group noted that the hedge fund has thought hard about how best to deploy this capital, and has announced today the intention to buyback all of debt securities which will optimize the efficiency of  capital and liquidity structure, and will lead to annualized pre-tax interest and coupon savings of $78m from 2014 onwards. The redemption in surplus capital will be $470m, giving pro forma surplus capital at January 1,2014 of at least $450m according to the firm.

Analysts react

Analysts had mixed reactions to the results from Man Group Plc (LON:EMG).

SocGen noted that all product types saw net redemptions in the quarter (Guaranteed: -$0.3bn, AHL Open
ended: -£0.6bn, GLG: -$0.6bn) with the worst of these redemptions in the two lower margin products of Institutional (-$1.1bn) and Long-only (-$1.1bn). Positive investment performance of £2.8bn offset these outflows, although FX added an additional drag to FUM of $1.6bn.

Key positives in the statement are a) the intention to eliminate the $78m pa interest drag by paying off its debt from excess cash and regulatory capital; and b) the good investment performance across the products with a large number of funds (at GLG in particular) at performance fee earning levels. Currently AHL open-ended is c.4.5% off its high water mark.

However, Canaccord Genuity noted that flows remain weak and management has guided to continued weak flow metrics with conditions remaining challenging. Geographically, Japan feels better coming off a 20-year bear market, Europe is still weak, and risk appetite is expected to improve in the US. They expect flows to continue to be weak in Q2/Q3 this year.

The debt buyback should reduce B/S gross cash by $1.2bn ($2bn at Q412) and surplus capital is expected to stand at $450m going into 2014. On the flip side, this should imply lower uncovered dividends in forecast years with dividends closely tracking net adjusted mgmt. fees. Some firepower still remains for bolt-on acquisitions.

Summary

While the shares opened down 2% today following the statement, they have since recovered to reach a 13-month high. Today’s statement was largely as expected, but some believe that the debt tender programme and performance fee generation are outweighing the cautious outlook and may indicate signs of stabilization in the business. Most of the company’s challenges are largely known by the market and likely priced in.