Middling Man

Markets go up, markets go down. As a hedge fund running myriad investor strategies, volatility is baked into the business model of Man Group (EMG) – as earnings, client inflows and investment performance have repeatedly shown in recent years.

On some measures, 2020 turned out to be a decent outing for the FTSE 250 constituent. For the second year in a row, foreign exchange movements were positive for funds under management (FuM), conspiring to add $0.8bn (£0.6bn) to the asset pile. A softening in the dollar against a largely sterling-denominated fixed cost base was also good for overheads, although 2021 has started “with an FX headwind” as hedges have rolled off.

Most encouragingly, a strong fourth quarter resulted in client net inflows of $1.8bn for the year, against outflows of $1.3bn in 2019. The net effect, combined with a positive investment performance in the period, was to lift FuM to $123.6bn.

Nevertheless, investment performance was both significantly down on 2019, and added up to middling client returns of 2.8 per cent against opening funds. As a result, performance fee earnings fell by nearly half to 5.9¢ per share, not that you would know this from a mere 5 per cent clip in employee compensation to $451m.

Here it is important to note that group-wide earnings were ahead of the most recent consensus expectations for 13¢ a share. Yet a wider perspective is also important. A year ago, the market thought 18¢ was a reasonable target; skip back to the spring of 2018 and the City reckoned 24¢ might be in the offing.

None of those analysts saw Covid-19 coming. Yet chief executive Luke Ellis’ claim that “talent and technology delivers superior returns for our clients and growth for our shareholders” still rankles after a year in which fund performance was 1 percentage point adrift of the Man-appointed peer group average.

Neither is the bar to grow capital particularly high for an ad-valorem-plus-performance fee model. Save for an unlikely mass liquidation of large institutional investor positions, earnings should grow strongly over the long term.

They have not, as we noted in our (fortunate rather than prescient) sell call early in 2020, which detailed an erratic earnings core management fees that have gone sideways for a decade. In fact, the shares have underperformed the FTSE All-Share Index over five years, according to FactSet, even after share buybacks and reinvested dividends are factored in.

This helps to explain why the stock is valued cheaply on 12 times this year’s consensus earnings forecast of 18¢ per share. The establishment of a progressive dividend policy therefore adds some accountability, however belated.

A more focused vision for shareholder value – like the one just outlined by the similarly drifting and cost-heavy money manager St James’s Place (STJ) – is needed at some point. There is probably a sophisticated argument for the differentiated quality of Man’s earnings, but it has not resulted in a premium rating, and rightly so. Hold.

Last IC View: Hold, 122p, 31 Jul 2020