Man Group Has $1 Billion Outflows; Shares Slide on Cash Concern

Date: Tuesday, May 1, 2012
Author: Jesse Westbrook, Bloomberg

Man Group Plc (EMG), the world’s biggest publicly traded hedge fund manager, said clients withdrew a net $1 billion in the first quarter and costs such as employee bonuses ate up more cash than analysts expected.

The shares slid as much as 8 percent. Clients redeemed $4.1 billion from Man’s investment funds, which was partly offset by $3.1 billion of sales, the London-based company said today.

The company reported that net cash fell 56 percent to $250 million in the three months ended in March, raising concern that it’s spending too much money at a time when profits are falling. Finance Director Kevin Hayes said on a call with analysts that staff bonuses, taxes and loans to some of Man Group’s funds accounted for the lower cash reserve. Analysts have cut estimates for Man’s fee revenue after its biggest hedge fund, the $19.5 billion AHL computerized trading system, fell about 2.1 percent this year and lost 6 percent in 2011.

“The surprise to me was how low the net cash position was,” RBC Capital Markets analyst Peter Lenardos said in an interview. “Man will pay an uncovered dividend this year, so the balance sheet could get weaker.”

Man Group in March said it plans to pay a dividend for 2012 of 22 cents a share.

The shares fell 6.2 percent to 97.1 pence at 10:55 a.m. London time, giving Man a market value of 1.77 billion pounds ($2.87 billion). The shares dipped below their closing price on April 24, when they began a week-long rally on speculation Man’s stock drop over the past year may attract a bidder for the firm.

Takeover Target

Assets under management increased to $59 billion from $58.4 billion after rising stock markets in the first three months of the year led to gains at the company’s GLG unit. That exceeded Lenardos’ estimate of $58.8 billion. Gurjit Kambo of Credit Suisse AG forecast $58.5 billion.

The stock fell to an 11-year low last week, leaving the firm trading at a 35 percent discount to the value of its assets minus liabilities. The decline has made Man Group a takeover target because a potential buyer would be paying a low price for its distribution network in Asia and hedge-fund fees that typically outpace those on mutual funds, UBS AG analyst Arnaud Giblat wrote in an April 24 report.

“We don’t feel that we need a big brother” to achieve our strategic goals, Chief Executive Officer Peter Clarke said on a call with reporters. He declined to comment on the takeover speculation.

Slower Redemptions

Outflows from Man Group’s investment funds were $300 million less than estimated by Kambo, who has an outperform rating on the stock. Redemptions declined 27 percent from the $5.6 billion that clients pulled in the fourth quarter. Sales were unchanged from the three months ended in December and will likely remain “muted” until Man Group improves its investment performance, Chief Executive Officer Peter Clarke said on a conference call with reporters today.

“Whilst a recovery in AHL is key for greater sales momentum, the slowdown in redemptions is encouraging,” Kambo wrote in a note to clients today.

Man Group, the worst-performing member of the U.K. benchmark FTSE 100 Index (UKX) over the past year, has tried to improve AHL by slowing the speed of trades, diversifying its investments and hiring additional scientists to oversee the program. AHL attempts to capture trends in futures prices of assets ranging from currencies to commodities and stocks.

AHL funds would have to rise about 14 percent on average to hit their so-called high-water mark, the point at which Man Group earns the most lucrative fees for positive investment performance, the company said in the statement.

The AHL model ‘is “not broken, but needs a better rest of 2012,” Barclays Plc analyst Daniel Garrod, who has an overweight rating on Man Group, wrote in an April 27 report to clients. “Talk of a permanent demise is overdone.”

Debt Review

Moody’s Investors Service said last month it was reviewing Man Group debt for a possible downgrade, citing a decline in assets under management, falling sales, lower profit margins for GLG products versus AHL and persistent underperformance for the company’s hedge funds. Moody’s, which gives Man Group debt its second-lowest investment grade, also questioned whether “high fees” charged by hedge funds were sustainable.

RBC’s Lenardos has said Man should consider cutting the fees on AHL, which is priced at a premium to competing funds that have produced better returns. The company charges AHL investors 3 percent a year to oversee their assets and takes 20 percent of investment gains, according to data compiled by Bloomberg. Most hedge funds charge investors a management fee of 2 percent and 20 percent of any profits.

To contact the reporter on this story: Jesse Westbrook in London at jwestbrook1@bloomberg.net