Man Group (LON:EMG)

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Caleb Li

With $46.8 billion USD of funds under management ^[1], Man Group is an investment management firm specializing in product structuring and risk management. ^[2] Man Group sets itself apart from competition with its ability to design and manage complex investment vehicles. ^[3] Man Group's main source of revenue comes from its management fees from their investment funds and hedge funds, with additional revenue coming from fees when funds outperform. In FY2009, the company earned $1,861 million of its $2,488 million in revenue from these fees. ^[1]

In 2008, the company purchased a 25% stake in alternative investment manager Nephila Capital for $50 million ^[4]. Furthermore, it took a 50% interest in credit specialist Ore Hill. Man Group offered $195 million in cash together with new $40 million in new Ordinary Man Group shares ^[5] The company sought to expand its range of investment products through these acquisitions. Furthermore, 2008 was a turbulent year for the financial markets as the market liquidity evaporated (see 2008 Financial Crisis ). Man Group's private investor business received additional funds of $2.2 billion that were invested in less structured products with transparency, liquidity, and a strong track record. However, Man Group's institutional investor business had net outflows of $4.3 billion as institutional investors redeemed their funds for liquidity, disregarding performance.

Company Overview

Headquartered in London, Man Group manages assets for both large institutional clients and private investors internationally, although the majority of its clients come from Europe and Asia. Man Group offers three products: guaranteed and open-ended products for the private investors and institutional products for the institutional clients. Guaranteed products are products that pay back the face value at maturity and part of the investors' funds used to purchase the guarantee from a major financial institution.^[6] Open-ended products are a type of product that does not have restrictions on the number of shares issued.^[7] The institutional clients invest in Man Group's institutional products, which include the investment manager RMF's fund of hedge funds, a fund that focuses on alternative investments ^[8] Man Group's primary revenue sources come from performance fees and management and administrative fees on the funds.

In 2008, the financial markets saw extreme turmoil globally. Financial services industry business models were stressed. Man Group was affected by the turmoil as its fund under management fell 37% to $46.8 billion. Its earnings for the year was reduced 40% to $1.2 billion, before adjusting items. ^[9]Despite the decline, Man Group was able to raise $2.6 billion from private investors in both open-ended and guaranteed formats. ^[9]

Business and Financial Metrics

In FY 2009, Man Group had total revenues of $2,488 million, a decrease from $3,222 million a year earlier. ^[1] Earnings Before Interest and Taxes (EBIT) of $743 million, and net income of $503 million. ^[1] Assets Under Management (AUM) decreased to $46.8 billion from $74.6 billion a year before. ^[11] In this fiscal year, Man Group increased its private investor investments by $2.2 billion, while institutional investors saw a decline of $4.3 billion. ^[11] This can be attributed to the poor performance from the hedge funds, and in December 2008, RMF had about $360 million invested indirectly in two Madoff-related funds. ^[12].

Business Segments

Man Group operates as a single business. However the revenue can be broken down into two sources, gross management and other fees and gross performance fees.

Gross Performance Fees (25.2% of Total Revenue of FY2009)^[10]

Man Group has a set of core investment managers to invest the funds. For example, AHL is a quantitative core investment manager and is one of the leading managed futures manager that run strategies primarily directional. This means they seek to identify and take advantage of upward and downward price trends. ^[14] AHL contributed to the bulk of the performance fees with $609 million (97% of performance fees). The other managers contributed $18 million.^[10] Overall, performance fees income of $627 million is a 47% decrease compared to 2008. ^[10] This can be attributed to the tumultuous markets and 2008 Financial Crisis.

Gross management and other fees (74.8% of Total Revenue of FY2009) ^[10]

Gross management and other fees decreased 8% in FY2009 to $1,861 million. The majority of the decrease can be attributed to the decline in assets under management declining 6% to $65.1 billion for 2009 from $69.3 billion year prior. ^[10] Furthermore, there is was a shift in private investors investing strategies as they shifted their funds from the higher margined guaranteed products to the slightly lower margined open-ended products. ^[10]

Trends and Forces

Strengthening of the U.S. Dollar (USD) led to foreign exchange losses for funds under management

Man Group has 48.5% of their funds in currencies other than the US dollar, thus leading to a $4.2 billion loss in FY2009. This impacted the non-US dollar fee income for the year, lowering it by approximately $23 million in US dollar terms as a result of movements in average exchange rates for 2009 compared to 2008. Although income from fees decreased, this decrease is offset by the lowering of operating costs. Since most of the operating costs are mostly denominated in sterling francs, the weakening of sterling against the US dollar during the year reduced costs for 2009 by $18 million in US dollar terms. ^[10]

Investor funds are shifting from potential strong target returns to lower margin guaranteed returns

Due to the financial crisis, Man Group went through a derisking process by reducing its investment exposure across the MGS product range in order to protect investor capital. ^[10] MGS products are exposed to market risk and pursue strong target returns, thus Man Group's strategy was to reduce balance sheet exposure in the volatile market conditions. ^[16] Therefore, Man Group had an amortization charge of $107 million related to unamortized upfront sales commission associated with MGS products. ^[17]

Market liquidity has evaporated, moving the investments from the market to high liquidity investments.

Man Group continues to invest and expand the AHL model and shifts a bias towards managed futures . For example, AHL Core is a fund which trades a selection of highly liquid futures and forwards across different sectors. ^[16] Furthermore, institutions are seeking to move funds with high liquidity regardless of performance. Man Group has allocated 48% of their funds to managed futures, which has returned 3.3% in FY2009. ^[18]

Competition

Man Group faces competition from other companies that offer alternative investment products and brokerage services to both retail and institutional clients, including Invesco, Aberdeen Asset Management, and F&C Asset Management.

• Invesco is one of the leading asset managers with customers majority of their customers in the USA, United Kingdom, and Canada. With a similar customer base of private investors and insitutions, it has $350 billion in total AUM. The investments are placed in equities, fixed income, and alternative investments. Invesco reported revenues at year end 2008 of $3.3 billion and a net income of $421 million. ^{[19] [20]}

• Aberdeen Asset Management, with $178 billion in AUM, is an asset management company based in Scotland. Their primary customers are in the UK and Europe, and recently they reached an alliance with Mitsubishi UFJ to reach the Japanese client base, which Man Group has a stake in. ^[21] In 2008, it had total revenues of $781 million, and net income of $85.1 million. ^[22]

• F&C Asset Management, with $150.36 billion in AUM is one of the top asset management companies in the UK and Europe. With the majority of the clients coming from insurance copmanies and institutions, F&C Asset Management competes with Man Group for the institutional clients. Their main investments are in fixed income. ^[23] At year end 2008, it had total revenue of $374 million, and -$85 million in net income.^[24]

Note: Financials for Aberdeen Asset Management and F&C Asset Management are reported in British Pounds (£). For comparative purposes,Aberdeen Asset Management and F&C Asset Management data in the above table was translated to USD using the GBP/USD exchange rate of 1.622 on 3 June 2009.^[26]

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5} Man Group Press Release 28 May 2009 pg. 14
2. ↑ Man Group Annual Report 2009 pg. 2
3. ↑ Man Group Annual Report 2009 pg. 24
4. ↑ i-Law
5. ↑ Man Group Press Release 31 March 2008
6. ↑ Man Group Annual Report 2009 pg. 6
7. ↑ Investopedia: Open-end Fund
8. ↑ Man Group's RMF
9. ↑ ^{9.0 9.1} Man Group Press Release 28 May 2009 pg. 2
10. ↑ ^{10.0 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8} Man Group Press Release 28 May 2009 pg. 9
11. ↑ ^{11.0 11.1} Man Group Press Release 28 May 2009 pg. 8
12. ↑ Man Group Annual Report 2009 pg. 32
13. ↑ ^{13.0 13.1} Man Group Annual Report 2008 Pg. 87
14. ↑ Man Group Annual Report 2008 pg. 62
15. ↑ Man Group Presentation 28 May 2009 pg. 37
16. ↑ ^{16.0 16.1} Man Group Annual Report 2008 pg. 63
17. ↑ Man Group Press Release 28 May 2009 pg. 11
18. ↑ Man Group Presentation 28 May 2009 pg. 37
19. ↑ ^{19.0 19.1} Hoovers Invesco
20. ↑ IBG, 2008 10-K Item I Pg. 4
21. ↑ Aberdeen Asset Management Annual Report 2008 pg. 7
22. ↑ ^{22.0 22.1} Hoovers Aberdeen Asset Management
23. ↑ F&C Asset Management Annual Report 2008 pg. 14
24. ↑ Business Week FCAM
25. ↑ F&C Asset Management Interim Management Statement 31 March 2009
26. ↑ GBP/USD Exchange Rate, X-Rates.com