From Fitch Ratings
As recent acquisitions have entirely been financed by surplus capital, gross leverage has remained unchanged, supporting Man’s overall credit profile.
For 2014, Man reported a pre-tax profit of USD481m, adjusted for USD97m amortisation in intangible assets, litigation costs and other non-operating items (USD241m in 2013), compared with USD297m for 2013. Funds under management (FUM) increased strongly (by 35% to USD72.9bn) largely as a result of acquisitions, which added USD16.2bn to Man’s FUM in 2014. The acquisitions also diversified Man’s distribution and sales capabilities and strengthened its presence in the large US market, which many European investment managers are targeting. If acquisitions are excluded, FUM increased by 5% year-on-year, which still compares favourably with many investment manager peers. Net sales were positive in 2014 (USD3.3bn), following net outflows in 2013 (USD3.6bn).
The 62% improvement in adjusted pre-tax profit was largely driven by significantly reduced compensation expense (down 12% at USD391m), reflecting the completion of the group’s USD270m cost savings programme, by lower net finance costs due to debt buy-backs in 2013, by lower external distribution costs and by sharply higher performance fees (up 65% at USD367m, including USD27m investment gains), which compensated for 16% lower management fees (to USD819m). The improved performance came after a difficult period for alternative investment fund managers and is, in Fitch’s view, important for the group’s long term performance and future flows from institutional investors.
As a result of a changing products mix towards more institutional clients and less retail and discretionary FUM, Man’s gross FUM margin dropped sharply (by 46bps at 131bps at end-2014). However, the reduction in Man’s net margin (net of distribution costs) was less pronounced (down 36bps at 114bps) since distribution costs for institutional FUM tend to be lower.
Both the reduction in distribution costs and the increase in performance fees were supported by the solid performance of its alternatives platform (AHL) as well as by Man strengthening its alternative and quantitative strategies product range, notably through the acquisition of Numeric Holdings LLC (Numeric) in September 2014. Numeric had USD16.7bn in FUM at end-2014.
In 2014, around 87% of Man’s performance fees related to either its alternatives (AHL) or quantitative equity (Numeric) product range with 97% and 98% of performance-fee eligible products, respectively, outperforming their high-water mark (ie the highest valuation of a specific product, which typically triggers performance fees). This is in stark contrast with Man’s other strategies, GLG and FRM, where a comparatively weaker performance resulted in only a fraction of FUM outperforming their respective high-water marks.
While a higher proportion of performance fees (31% of gross fees in 2014; 19% in 2013) leads to some earnings volatility, Man’s increased diversification in terms of investment strategies should still improve overall earnings stability. In addition, since management’s stated dividend pay-out policy is primarily linked to management fees (at least 100% of adjusted management fee earnings per share each year), a higher proportion of performance fees should improve generation of surplus capital.
In 2014, surplus capital dropped by 45% (to USD419m) almost entirely as a result of acquisition financing and share buybacks. Net tangible assets fell to USD0.8bn at end-2014 from USD1.1bn at end-2013. Management has announced that surplus capital will fall further as a result of financing for announced acquisitions (Silvermine, a US CLO manager with USD3.8bn FUM, New Smith LLP, USD1.2bn FUM and Merrill Lynch Alternative Investments LLC’s funds of hedge funds, USD1.2bn FUM) and a USD175m share buy-back programme. However, we view Man’s capital management as adequate for the group’s current rating level.
Man’s ratings continue to benefit from its sound franchise in alternative investment fund management, strong liquidity, and moderate credit, liquidity and market risks arising from the use of its balance sheet to support its franchise. The ratings also consider Man’s variable but improving earnings and profitability and signs of stabilisation in FUM.