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Questor: it is clear that there is momentum behind Man Group. The shares are a buy
Questor share tip: the hedge fund manager is better protected from the rise of passive investing than most rivals
It was an announcement that shook the literary world. After 17 years, hedge fund firm Man Group said in January it would end its sponsorship of the Man Booker Prize, the annual celebration of the best in contemporary fiction, whose winners have included Yann Martel’s Life of Pi and Anna Burns’ Milkman.
It’s one of the longest sponsorships of its kind, so how on earth could Man, which donated a chunky £25m in support of literature over the period, be replaced? Quite easily, it turned out. Step forward Sir Mike Moritz, the Welsh-born Silicon Valley investor whose charity will bankroll the prize for the next five years.
Back in the City, the company is trying to write a new chapter of its own.
The recent story of Man has been one of diversification, after it ran into trouble when its flagship “black box” AHL Diversified fund lost investors’ confidence.
Aided by acquisition, now its product offering falls into four main buckets: quantitative, trend-following funds operated under the AHL brand; “long-only” Numeric portfolios that base stock picking on fundamentals, which is currently its largest grouping; conventional GLG hedge funds and multi-manager FRM.
Alternative strategies such as hedge funds are not unaffected by the biggest market moves – such as the sharp stock market sell-off last autumn.
- Read Questor’s rules of investment before you follow our tips
Equally, Man’s first-quarter numbers could not have been harmed by a strong start to 2019 for major indices once the US Federal Reserve indicated that further interest rate rises were on the back burner. Funds under management stood at $112.3bn (£87bn) at the end of last month as forewarned outflows of $700m were offset by a positive investment movement of $4.5bn.
Asset managers stand at a fork in the road. Not only must they ponder where next for markets when veterans such as Larry Fink of BlackRock forecast a “melt-up” in valuations that might presage the next crash. They also have to prove their worth in a world where passive index trackers are a magnet for cash.
Man’s method of investing is decidedly active. One view is that its mix offers a better defence against margin erosion than some traditional fund houses can muster. But another tack is that Man is just too complicated and consequently not a stock for every private investor. There is a reason that many hedge funds operate away from the spotlight of the public markets.
What is clear is that there is momentum here. In a detailed note, company followers at Berenberg, the bank, forecast a compound annual earnings growth rate of 17pc over the next five years. It argued that the growth in Man’s management fees – which contribute the vast majority of revenues – had been masked by the run-off of retail products sold before the financial crisis.
Linked to AHL, they offered a guaranteed return and therefore fees were pegged very high. Today they chip in little and the focus is on institutional business, which is designed to bring in a more reliable earnings stream.
Revenue from management fees is forecast by Credit Suisse to be flat this year at $784m, but the contribution from performance fees is expected to jump from $127m to $206m and carry on growing. Cash flows fund regular share buybacks. Some $65m of stock has been acquired since a $100m programme was announced in October.
While the company remains a buyer of its own shares, there are mixed messages from Man’s executive ranks. When conditional awards vested and nil-cost options were exercised last month the chief investment officer, Sandy Rattray, pocketed £480,000 from offloading stock while Jonathan Sorrell, the group’s president, trousered £275,000.
The shares are already 16pc higher than they were at the moment of sale.
They should go higher still. It looks as though the City is turning bullish on Man, although there is some caution as price targets are reined in. Trading at a little over 10 times next year’s forecast earnings, the shares are worth tucking away.
Questor says: buy
Ticker: EMG
Share price at close: 157p
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