's CEO Manny Roman toldanalysts that the last six months were the "toughest half for hedge fundssince 2008," even though the British investment manager has not sufferedgreatly as a result of Brexit.
Lowerthan expected performance fees saw funds under management for the world'slargest listed hedge fund manager slip by more than $2 billion year over yearin the first half of2016, to $76.4 billion.
Man'sflagship AHL product was not spared, with its performance fees down 78% yearover year to $35 million. As a result, the company's adjusted profit before taxfell 65% over the same period, from $280 million to $98 million, whilestatutory profit attributable to owners of the parent was $49 million in thefirst half, compared to $130 million in the year-ago period.
Itsshares were down 7.84% to 112.80 pence at market close on July 26.
Andthings could have been much worse for Man Group. For one, it "is notexperiencing Brexit-related redemptions," said Peter Lenardos, managingdirector of RBC Capital Markets, in a note.
Infact, redemptions were 33% lower than last year, at $8.8 billion in the firsthalf of 2016, said CFO Jonathan Sorrell in a call with analysts after therelease of the six-month results.
Partly,this reflects the shift to large institutional clients, whose redemption rate(around 23% in 2015 and the first half of 2016) is lower than retailinvestors'. But AHL's inflows are also evidence that strong demand remains forthe product's quantitative strategies—inflows of $1.0 billion, improving onoutflows of $2.6 billion in the first half of 2015, show investors'"flight to quants," trusting algorithmic computer trading as the bestway to benefit from volatile markets.
AHL'sperformance has been "much better than the share price indicates, so thata small positive movement in AHL's performance could start to generate amaterial level of performance fees," Lenardos said.
"Occasionalperiods of weak performance fee profits are to be expected at Man," CreditSuisse analysts Tom Mills and Martin Price told The Wall Street Journal.
Thedecline in FUM was the result of trading-floor losses rather than outflows. Atrading strategy long on fixed income and short on commodities benefited AHL inJanuary and February; from March to June, an approach shorting equities andagricultural commodities proved less kind.
Beinglong on fixed income and gold positioned it "well for post-Brexitvolatility," however, Man said in its earnings presentation. Thediscretionary strategies of its GLG funds weathered the Brexit vote less well.
Lookingahead, Man's focus will be increasingly on institutional rather than retailclients, and on America, accounting for a growing proportion of its sales,Roman told analysts during the earnings call.
Chinais a promising market too, with FUM doubling to $200 million. Higher sterlingcosts in comparison to revenue mean continued weakness of the pound will be anet benefit for Man from 2017 onwards, Roman added, while the majority of itsfund sales into Continental Europe are Irish- and Luxembourg-domiciled UCITSwere unaffected by Brexit. The group is committed to keeping its headquartersin the U.K., according to the CEO, who recently announced his departure fromthe company at the end of August.
Withregard to the Man's first-half earnings, he also noted that the companycontinued to have a strong surplus capital of $470 million and an undrawn,available revolving credit facility of $1 billion. Roman even suggested thatwith this healthy capital surplus, Man may seize the present turmoil to acquireone or two smaller competitors, as acquisitions could offer a way for Man toremedy its current reliance on AHL management and performance fees.
Man'sfirst-half EPS dropped to 2.9 cents from 7.5 cents a year earlier. Man Group'sboard declared an interim dividend of 4.5 cents per share, down from 5.4 centsper share in the first half of 2015. The interim dividend will be paid Aug. 31to shareholders on record Aug. 12 at the rate of 3.43 British pence per share.
"Thepositives in our opinion are the resiliency of Man's net flows and an outlookstatement that indicates no adverse impact—so far—from the uncertainty createdby Brexit," added Lenardos.