Man Group Plc, the world’s biggest publicly traded hedge fund manager, reported that clients withdrew a net $1 billion in the first quarter, while costs such as employee bonuses ate up more cash than analysts expected.
The shares slid as much as 8 percent as analysts cut their earnings forecasts for the company. 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.
Man 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 had reduced 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 said in March it plans to pay a dividend for 2012 of 22 cents a share.
‘Seasonal’ Cash Drop
The company’s drop in cash was attributable to “seasonal factors” such as yearly bonuses that were paid out in the quarter, and money lent to funds has been repaid, Man Group spokesman David Waller said. “Man remains a highly cash generative business with a strong financial position,” he said.
The shares fell 6 percent to 97.3 pence at 4:16 p.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 spur a sale of the company.
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’s 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 Man trading at a 35 percent discount to the value of its assets minus liabilities. Arnaud Giblat, an analyst at UBS AG, said last week that the decline has made Man Group a takeover target as potential buyers would pay a low price for its distribution network in Asia and hedge-fund fees that typically outpace those on mutual funds.
“We don’t feel that we need a big brother” to reach Man’s goals, Chief Executive Officer Peter Clarke said on a call with reporters. He declined to comment on the takeover speculation, while saying shareholders continue to support management.
About 85 percent of shareholders voted in favor of Clarke’s $6.98 million pay package for 2011 at the company’s annual meeting today, Man Group said in a statement today.
Investors also re-elected Chairman Jon Aisbitt and eight other directors, including Clarke, to the board.
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, Clarke said.
Peel Hunt analyst Stuart Duncan cut his rating on Man Group to hold from buy after the company announced results today.
“A significant discount is deserved” for Man Group shares compared with rivals, given the company’s dependence on AHL, Deutsche Bank AG analyst Carolyn Dorrett wrote in a note to clients today. There is “downside risk” to consensus analyst estimates that Man Group will earn 11.3 cents a share this year, said Dorrett, who has a hold rating on the company.
Man Group, the worst-performing member of the U.K. benchmark FTSE 100 Index 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.
Moody’s Investors Service said last month it was reviewing Man’s debt for a possible downgrade, citing reduced assets under management, falling sales, lower profit margins for GLG products versus AHL and fund underperformance. Moody’s, which gives Man 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 fees charged on AHL, a 25-year-old fund that’s priced at a premium to competitors with better recent returns. Man 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.
Winton Futures Fund Ltd., which also relies on computer models to predict trends in futures prices, charges a 1 percent management fee and a 20 percent performance fee. The $10.2 billion Winton fund, overseen by Cambridge University-educated physicist and AHL founder David Harding, has risen about 9 percent a year on average since the start of the financial crisis in 2008, beating AHL’s annual gains of about 4 percent. Winton has had just one down year.
BlueCrest Capital Management LLP’s $14 billion BlueTrend Fund has gained an average 16 percent yearly since 2008, while charging a 2 percent management fee and a 20 percent performance fee, and never incurring a loss since its 2005 inception.
UBS is calling Man Group a takeover target less than two years after it bought GLG Partners Inc. for $1.6 billion. Clarke, 51, acquired London-based GLG, which has individual hedge-fund managers who trade stocks, bonds and currencies, after analysts questioned whether Man was too reliant on AHL.
The strategy paid off initially, as sales growth drove a 3.5 percent increase in assets under management to $71 billion in the first six months of 2011.
The European sovereign debt crisis then triggered volatile markets in August and September that hindered performance at GLG, prompting clients to withdraw money. Man Group assets under management fell to $58.4 billion by the end of the year.
The decline in Man Group’s shares has hurt executives who joined the company from GLG after the acquisition and received stock as part of the buyout. GLG co-founder Pierre LaGrange, 50, who oversees the European Long-Short hedge fund, owns about 3.5 percent of Man’s stock. Former GLG co-CEO Emmanuel Roman, 48, who serves as Man Group’s chief operating officer, owns a 1 percent stake. Noam Gottesman, 50, who shared the CEO title with Roman at GLG, holds about 2 percent of Man Group.
The stock was priced at 221 pence a share when LaGrange, Roman and Gottesman received it in 2010, more than double its current value, according to Man Group filings. The executives are restricted from selling most of it until October 2013.