Man Group - Manny Made Man

Man Group (EMG.L): Last week’s Third Quarter update, to 30^th September, included the volatile month of August. It showed FUM of $76.8bn, down from $78.8bn three months earlier and $79.0bn at 31^st December 2014 (adjusted for subsequent acquisitions). Net inflows in the quarter were $1.4bn, more than offset by market movements and FX. Of total FUM, $44.8bn (58%) are Alternative, with $30.5bn (40%) being Long Only and $1.5bn (2%)  being Guaranteed. The Alternative strategies drew in $1.1bn as net inflows out-stripped market moves and FX. However Long Only fell by $2.9bn as redemptions (mainly from GLG) hit hard. Within Alternatives, AHL claimed a good quarter, ending with 63% of open-ended funds at high watermark (HWM) and another 18% within 5% of HWM. In Alternatives, Discretionary ended the quarter with 14% of FUM at HWM and 48% was within 5% of HWM. In Long Only, the Global and Emerging Market core strategies hit rough water, experiencing net outflows, although they did out-perform benchmarks. The Discretionary strand was hit by poor absolute investment returns of $1.5bn due to Japan Core Alpha falling 14.8%, against the benchmark fall of 13.5%.

Clearly the group is better balanced now than in the AHL dominated days of yore (but for some risk junkies, a falling margin trend makes it less attractive). Valuing the shares is still a cold towel exercise though as you will see. In the first half, eps of 13.9c was made up of management fees (5.4c) and performance fees (8.5c). In the first half they bought back $175m of shares and declared surplus capital of $425m. The dividend was set at 5.4c (3.47p) against 4c. This is all in line with their policy of paying out 100% of adjusted management fee eps, with any build up of surplus capital being distributed periodically. Consensus eps for 2015 are 21.5c (13.9p), which, working back from a dividend forecast of 10.4c (6.7p) might be split between that amount of management eps and 11.1c (7.2p) of performance eps. A conservative view is that performance fees come and go and perhaps should have a PE of 0. So at 159p, the 6.7p of management eps give a chunky PE of 23.7x, although using the full eps of 13.9p is a PE of 11.4x. Spinning it around, if the management eps are worth 15x then that gets you to 100.5p. So, the performance fees need to be worth 8.1x to explain the share price of 159p. That is too much in my view. The management eps drive the dividend, so at 6.7p, the prospective yield is 4.2%, which is not startling. With an EV (using surplus capital only) around £2,975m ($4,611m) and FUM of $76.8bn, that ratio is 6.0%, which doesn’t add much support to the valuation. Overall, the nature of the beast breeds opacity in forecasts and that means that I struggle to see value for income investors at these levels. (Neil Cumming^, 19^th October 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower