Watching Man, a real dog?

Man Group - 3 year Relative.

This one came up on a three year under performers screen that I run and it attracted my attention as it had recently seen some earnings upgrades and some signs of life in the share price. Man Group PLC (EMG) operates in the alternative investment management sector (Hedge funds) and they have a geographically diverse investor base. The Company offers a comprehensive suite of funds through its performance-driven investment engines AHL, GLG and FRM to a highly diversified client base. 

On a cursory investigation I saw that the recent bounce in the share price had come on the back of the full year results. These showed some signs of stabilization in the funds under management (FUM) at $54 billion, down 5% but up 1% excluding guaranteed products. They also flagged cost savings of $270 million by the end of 2015 and share buy backs of $115 million. In addition to this they had surplus capital of $760 million at 31st December 2013 or $550 million after accounting for the final dividend and the proposed share buy backs. On the dividend they paid a 5.3c final to give a total of 7.9c which at 100 pence puts the shares on a yield of around 4.6%.

Since then they have had an IMS on 9th May 2014 in which AUM actually went up overall to $55 billion with net inflows of $2 billion offset by a negative investment movement of $0.7 billion in the first quarter. While it is a positive that the FUM has risen and that there were net inflows - that was the end of the good news. The other highlights were all fairly negative and best summed up by Manny Roman, Chief Executive Officer of Man, who said:

"The market environment in the first quarter has been particularly challenging and March was a very difficult month for the industry. In this context, performance across the firm was reasonable on a relative basis.

Whilst we are pleased to have recorded a solid quarter of net inflows, we remain cautious in our outlook for asset flows for the rest of the year given recent mixed absolute investment performance."

So good, but not quite Carling as the beer advert says and you know a fund manager is struggling for positive things to say when they say "reasonable on a relative basis." On valuation grounds this one is looking more interesting as it stands on around 13.7x this years forecast earnings (pre any changes from the IMS) and with a yield of 5% based on a forecast dividend of 8.6c - 1.5x covered. The Enterprise Value is around £1.2 billion after adjusting the market capitalisation for the cash and this represents about 4% of FUM - which seems quite high compared to normal asset management valuations in takeovers. However, as this one is primarily a hedge fund specialist with higher fees this might explain that. So more research required there - especially as their funds have been struggling and I believe there has been downward pressure on hedge fund fees generally and question marks about whether they are sustainable in the longer term.

Thus on balance it goes onto my watch list as the turnaround / recovery still seems to need more time to work through and I need to do more research on their management fees and business mix going forward as that drives their dividend policy. In addition, technically in the chart below I see a gap opened up on the chart earlier in the year at around 85 pence after the shares jumped around the time of the final results. Consequently, as these gaps often get closed eventually, I'll set up an alert and wait for this eventuality before considering a purchase of this one. This would also likely bring it back closer to the 200 day moving average and its book value. 75 to 80 pence has also been the low end of the range in recent years where it has found support in the process of maybe bottoming out. I guess they and other hedge funds could come back into favour and perform better as and when there is more volatility for them to exploit, perhaps when Central banks fully scale back their support operations and come the next down turn in markets perhaps?