For asset managers seeking hedge fund-like returns on the cheap, Man Group Plc (EMG) is now offering the biggest discount on record.
The world’s largest publicly traded hedge-fund manager was valued at 0.65 times net assets this week before takeover speculation lifted Man Group’s stock from its lowest price in more than a decade, according to data compiled by Bloomberg. The London-based company also had about $1.7 billion in cash, more than any investment management firm in the industrialized world relative to its market value, the data show.
While Man Group fell more than 60 percent in the past year as the computers that run its $21 billion flagship strategy failed to spot profitable trades and Europe’s debt crisis caused clients to withdraw money, it may lure asset managers looking to expand globally, Robeco said. Man Group, which has almost 40 percent of assets outside Europe and the Americas, could give BlackRock Inc. (BLK) or Franklin Resources Inc. (BEN) better access to the $1 trillion mutual fund markets of Asia and Japan, and a larger slice of hedge-fund pools that command higher fees, UBS AG said.
“It could easily be taken over at this moment in time,” Mark Glazener, head of equities at Robeco in Rotterdam, which oversees about $200 billion and owns Man Group shares, said in a telephone interview. “The products are reasonably attractive. There is an attractive distribution network, which also has an emphasis on Japan and Asia, two of the most difficult markets” for asset managers to build out on their own, he said.
Barrels to Algorithms
Laura Humble, a spokeswoman at Man Group, declined to comment on whether the company is open to a sale or has been approached about a takeover. Man Group was valued at 1.73 billion pounds ($2.8 billion) yesterday.
Lauren Trengrove, a spokeswoman at New York-based BlackRock, declined to comment on whether the world’s largest asset manager is considering an acquisition of Man Group. Matt Walsh of San Mateo, California-based Franklin Resources said the manager of the Franklin and Templeton mutual funds doesn’t comment on takeover speculation.
Founded in 1783 as a barrel maker by the Thames River in London, Man Group now oversees more than $58 billion in assets across three divisions: the AHL managed-futures business, the Multi-Manager unit, and GLG, the U.K. hedge-fund manager that it acquired in October 2010.
AHL, which relies on computer algorithms to bet on the direction of everything from equity futures to commodities, is Man Group’s biggest fund. After rising every year since at least 1999 and posting a 27 percent gain in 2008 as stock markets collapsed, the strategy has declined in two of the past three years, according to data compiled by Bloomberg.
The fund, designed to have little correlation to equities, tumbled 17 percent in 2009 and dropped 6 percent last year, more than the Newedge CTA Index of managed-futures strategies in each of those years.
“Trading conditions have been tough,” Peter Clarke, Man Group’s chief executive officer, said in a statement in January. “Investment performance varied significantly across styles, with market volatility and reduced market liquidity impacting trading opportunities.”
Concern Europe’s sovereign debt crisis would make it more difficult for managers to find profitable investments also caused clients to pull money out of Man Group’s funds. The firm said assets under management fell 15 percent in the nine months ended December as redemptions exceeded sales.
Investment losses and client withdrawals have constrained fee income, and Man Group is mired in the longest earnings slump on record as operating profit declined in the past three fiscal years, according to data compiled by Bloomberg.
Analysts have also been cutting their profit estimates for 2012, the data show. This month, Moody’s Investors Service put Man Group’s credit rating on review for a possible downgrade, citing “continued under-performance from key funds.”
Man Group’s stock slumped to an 11-year low this week, leaving the firm trading at a 35 percent discount to the value of its assets minus liabilities. That was less than any time since at least 1998 and lower than the historical average of about 4 times book value, data compiled by Bloomberg show.
Man Group’s 1.06 billion pounds in cash is now equal to about 61 percent of its market value, the data show, or about six times higher than the median for developed-market investment managers globally with more than $1 billion in value.
“The market price very much undervalues the business,” said Ben Kelly, a special-situations analyst at Louis Capital Markets in London. “Valuation has always seemed a potential sticking point, but not anymore.”
Courting Mrs. Watanabe
Man Group gained as takeover speculation emerged. Arnaud Giblat, a London-based analyst at UBS, said in a report on April 23 that Man Group could be attractive because of its sales and distribution relationships in Japan and the rest of Asia, as well as alternative strategies that have higher fees than traditional mutual funds.
Today, shares of Man Group fell 1.5 percent to 93.75 pence.
Potential acquirers could profit from Man Group as investors look for higher returns in Japan, where almost 60 percent of the nation’s 1,483 trillion yen ($18.2 trillion) in household assets was held in currency and deposits, the nation’s stocks have lost more than 70 percent of their value since 1989 and 10-year government bonds yield less than 1 percent.
Man Group oversees more than $10 billion in assets in Japan and has relationships with three of the nation’s five biggest brokerages and four of its five largest banks, UBS said.
The company also charges AHL clients 3 percent a year to oversee their assets and takes 20 percent of investment gains, according to data compiled by Bloomberg.
That’s higher than many other hedge funds, which usually charge investors a management fee of 2 percent and 20 percent of profits. U.S. mutual funds invest in stocks charged an average of 0.8 percent in fees last year on an asset-weighted basis, according to the Investment Company Institute.
“We see significant scope for a U.S. or Canadian asset manager to seek to capitalize on the opportunity to access a top-tier distribution network,” Giblat said in a telephone interview. “From a corporate buyer’s perspective, if they think AHL is a great product and working, it is not difficult to see that it is undervalued.”
Man Group’s underperforming AHL strategy and client redemptions could still dissuade potential buyers as it faces competition from rivals including BlueCrest Capital Management and Winton Capital Management.
Peter Lenardos of RBC Capital Markets said the number of buyers may also be limited as increased financial regulation prompts banks to sell asset management units to raise capital.
“Cheap assets are cheap for a reason,” said Lenardos, an analyst at RBC in London. “They also can get cheaper.”
By closing AHL to new investors and running the fund to generate cash, Man Group could still be worth about 150 pence a share, a more than 50 percent premium to yesterday’s price, UBS said. The company’s cash could also lure buyers willing to take on the risk, according to George Godber, who helps oversee $22 billion at Charles Stanley & Co.’s Matterley division in London.
“They have a lot of cash, so if they don’t do the restructuring themselves, someone else will do it,” he said.