The world’s biggest publicly-traded hedge fund, Man Group Plc (LON:EMG), has been downgraded from Baa2 to Baa3 by Moody’s Corporation (NYSE:MCO) Investors Service. The hedge fund’s total asset under management is down to $52.7 billion in June this year, a drop from $71 billion a year earlier. Man Group Plc (LON:EMG) has been hit badly by the European debt crisis and withdrawal of funds by skeptical clients.
“The rating downgrades reflect continuing challenges in the company’s core business,” Moody’s said in a statement. The ratings agency further said, “there will be little, if any retained earnings given Man’s dividend policy and ongoing earnings pressure.” The review of Man Group Plc (LON:EMG) began earlier this year due to declining revenues, poor performance, and sliding management fee.
The $19.5 billion AHL, the flagship strategy of Man Group Plc (LON:EMG), has yielded poor returns. It fell 5.5 percent in 2011 and 3.3 percent this year so far. AHL has given an average annual returns of 18 percent since 1996. The company purchased FRM Holdings Ltd. that added $8 billion to the assets under management.
Man group, which has suffered a loss of $164 million in the first half of this year, plans to save $200 million by adapting stringent measures, such as cutting jobs, exiting the business in certain countries, and withdrawing the “guaranteed products” where the company has to pay high commissions. Moody’s Corporation (NYSE:MCO)’s report also highlights the Man Group’s financial weakness, which “has not returned to pre-crisis strength” even when the debt has subsided.
However, Man disagrees with the Moody’s Corporation (NYSE:MCO)’s pessimistic report. The London-based hedge fund said in a statement, “Man has made considerable progress in addressing its cost base and expanding its investment management capabilities. It remains financially robust and enjoys a strong position in the market.”
The company’s stock prices have declined 57 percent in the last 12 months due to poor earnings. Currently, Man Group is trading at 81.50 pence per share, which gives it a market value of 1.48 billion pounds ($2.33 billion).
However, Royal Bank of Canada (NYSE:RY) (also known as RBC) Capital Research disagrees with Moody’s and notes the following positive aspects about the hedge fund giant:
FRM acquisition should add scale and profitability to the Institutional FOF business. If Man successfully integrates FRM, we believe that this product line could become profitable. However, we believe that downward pricing pressure is most intense in this product line.
• GLG has the potential to be a profitable product line. According to Man, each incremental dollar brought into GLG is profitable; this analysis ignores an allocation of central costs. We reran our analysis utilising Man’s incremental dollar assumptions and determined that GLG was break-even and not loss making. However, we believe GLG’s current FUM balance is loss making. We believe that Man has the potential to turn GLG back into a profitable business line with increased cost discipline and greater scale.
• Our forecasts incorporate all announced cost savings. We believe the announced cost savings are necessary as a result of the reduced size of the business. We further believe that these cost savings are already reflected in the share price.
• Guaranteed is a key revenue generator with the highest profit margin yet we believe the product is in run-off. Guaranteed FUM have declined 52% in 18 months and we forecast another 21% decline in the next 18 months. We believe that Man’s cost savings programme is necessary to offset the loss of revenue and profitability associated with the run-off of the Guaranteed product.
• Performance fees matter for profitability, less so for valuation. Unless performance improves markedly we find it unlikely that Man will generate substantial performance fees in the near-term. While performance fees benefit profitability, we believe the market discounts these fees when assigning a value to Man.
• We believe there will be an increased reliance on AHL to generate profits. We continue to believe that AHL’s peers have lower management fees. Thus, even when AHL’s performance improves, we believe it still could have an issue with its above-market fee structure. If Man were to reduce its AHL management fees this would have an adverse impact on financial performance. We believe the incentive for Man to defend its AHL fee structure is high as it is
crucial to the overall profitability of the company.
