Man On Fire
Man Group shares are surging the most in six years after new CEO Luke Ellis scored a hat trick with investors.
The hedge fund announced a stock buyback, an acquisition and a jump in assets under management on the same day. It's a good start for Ellis, but there's a lot more to be done to outweigh the pressure from shrinking fees and growing competition.
First, the good news. The acquisition of real-estate specialist Aalto Invest and the opening of a specialist private-markets business is what investors want to see: more diversification away from hedge-fund strategies that have had a tough 2016. The Aalto acquisition will add only $1.7 billion of assets but provides a platform for future expansion.
Man Group could do with a boost from the current craze for money locked up for longer periods of time: Shares of Partners Group, a private-markets specialist, have risen 39 percent this year compared with Man's fall of 28 percent.
It was also heartening to see Man report $1.3 billion of net inflows in the quarter, the fifth consecutive increase. That helped to lift assets under management to $80.7 billion from $76.4 billion at the end of June, showing its core business is holding up. Hedge funds are staging a recovery after their worst start to the year since the financial crisis, and had their best quarterly performance since 2013 in the third quarter, according to Bloomberg News.
But less encouraging, if less surprising, is the fact that Man is still exposed to performance and fee pressures. Quantitative hedge fund strategies account for about a quarter of Man's assets and they have struggled to perform this year. Man's AHL Diversified fund is down about 8 percent. That makes it harder to reap juicy performance fees: only 3 percent of the AHL funds that could earn those fees are at the threshold for them to start flowing, according to Man.
Sure, things might improve next year, but remember that much of Man's appeal to the market has been its ability to monetize its investment performance. In the first half of 2015, pretax performance fees (on an adjusted and pretax basis) exceeded management fees by $64 million. This year they lagged by $82 million.
Investors can take comfort from the share buyback. It's a signal of confidence from Man and makes sense as the stock's forward price-to-earnings ratio of 14.0 is below the industry median of 15.6, according to Bloomberg data.
But the question is how Ellis keeps deploying capital in future, and if he makes more acquisitions in a competitive environment. Spending $100 million on buyback allows the company to keep shopping, in theory, with about $300 million left over. It's probably too soon to say that Man is itself a takeover target, but diversification may make it more valuable to bidders.
Ellis said it best himself: The industry faces two decades of fee pressure as competition steps up. Man Group may have proved today investor expectations were too negative. But there's a long journey ahead to close the valuation gap with peers.
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