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As investors favor large funds, Man Group benefits

At a time when institutional investors increasingly prefer larger hedge funds, the world's biggest publicly traded fund Man Group Plc saw funds under management leap to $95.9 billion in the first half of the year — an increase of $15 billion, and the highest level ever.

CEO Luke Ellis said on an Aug. 1 conference call that the first half had seen a continuing trend for large institutional clients to put more money to work with fewer managers. In the period, London-based Man saw its largest ever inflows in a half-year period, at $8.2 billion, while investment returns contributed $3.8 billion.

The January acquisition of London-based investor Aalto Invest Holding added a further $1.8 billion to the group's FUM. Aalto was the basis of a new Man Global Private Markets section which focuses on U.S. and European residential development investments, and which attracted $300 million in net inflows during the half.

"I'm afraid we wouldn't expect that pattern to continue in every future period," said Ellis. CFO Mark Jones said the second quarter was unusual in that the company "had inflows but no redemptions." He cautioned that the mainly institutional nature of Man's clients meant quarterly flows will be uneven, with one or two mandates significantly skewing the numbers.

The group attracted 12 new significant institutional investors in the half, but several involved low-margin mandates, Ellis said, meaning revenue margins compressed even as inflows increased.

"We'd expect both to moderate in the second half, especially given the bumpy nature of institutional flows," he said.

Even with margins compressing, net management fee revenue held up at $355 million, a slight improvement from $347 million in July 2016.

Man will pay an interim dividend for the year to Dec. 31, 2017, of 5 cents per share. After adjusting for this, the group has $375 million on hand in surplus capital, giving it cash on hand for further acquisitions, and some insulation against variable flows, pressure on margins and implementation costs later in the year associated with MiFID II regulations. Jones said the group was "actively reviewing" possible acquisitions, but had not yet identified any.

Particular bright spots among Man's strategies were continental European equity, generating 13.6% returns, and U.K. undervalued assets, returning 15.1%. Other funds showing growth were the fund of funds unit FRM (which Man acquired in 2012) with $3 billion of inflows, and $2.3 billion inflows into its computer division.

"New machine learning-based signals" would be added to Man's Dimension, Alpha, and Diversified funds this year, after the group appointed a new head of machine learning in April, said Ellis. Man has also funded machine learning research at the Oxford-Man Institute since 2007, where it sponsored a new research professorship in October 2016.

Both Man's popular Evolution and Dimension funds "are now soft closed" to new investors after reaching their capacity constraints, though "a little bit of extra money can come in through existing clients," Jones said.

Emerging market debt continued to attract inflows, raising $3.4 billion in the first half, though Ellis said his group's portfolio manager took a different position to much of the market, and was "bearish on emerging markets at the moment, and so unlike most people in emerging markets who are well long beta, he's short beta relative to the benchmark."

Ellis is approaching the end of his first year at the group's helm, having taken over in September 2016 from Emmanuel Roman.