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Man Group bounced back in 2017, but February market shock tempers enthusiasm

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Man Group bounced back in 2017, but February market shock tempers enthusiasm

Man Group Plc CEO Luke Ellis said 2017 had been "a year of very strong results across our business" after the company rebounded from a one-off driven loss in 2016 and saw its funds under management rise more than a third.

The U.K. hedge fund manager booked a full-year 2017 pretax profit of $272 million, swinging from a pretax loss of the same amount in 2016. Statutory profit attributable to owners of the parent company was $255 million, compared to a prior-year loss of $266 million.

Profits from performance fees were 27% ahead of expectations, analyst Justin Bates from boutique investment bank Liberum wrote in a note. Adjusted performance fee pretax profit amounted to $181 million, up from $27 million in 2016, while adjusted management fee pretax profit rose to $203 million from $178 million.

Net management fees increased by 7%, to $736 million, though the net management fee margin decreased to 72 basis points from 83 over the year, which Ellis said reflected stronger growth in funds under management, or FUM, allocated to lower-margin strategies.

Record inflows key FUM surge

Overall FUM rose 35% to $109.1 billion from $80.9 billion during 2017, boosted by a record $12.8 billion in net inflows. Market gains contributed $10.7 billion to FUM, while foreign-exchange translations added $2.9 billion.

The world's largest publicly traded hedge fund firm, Man Group benefited from buoyant global markets and a strong year for hedge funds in general. After five consecutive quarters of losses spanning the fourth quarter of 2015 to the end of 2016, the global industry saw $50 billion of inflows in 2017, and at 11.41% recorded its best returns since 2013, according to Mark O'Hare, CEO of research group Preqin.

On the other hand, Ellis said Man's AHL momentum strategies had performed poorly in the Feb. 2-9 market correction, although he said that "from what we've seen, we're broadly in line with our peer group" and "institutional clients understand there can be sharp reversals in market conditions." Bates said that in view of the "challenging" start to the year, Man "might see performance fee expectations tempered somewhat but we would expect to see management fee [levels] remain largely unchanged."

Man Group shares initially traded up Feb. 28, but by just around 2:30 p.m., they were down 3.65%, compared to a 0.3% fall in the broader FTSE 250 index of which they are a constituent.

Diversification a key

Ellis said Man Group was on a "journey" to greater diversity in its offerings, away from its pre-2008 model of "one central strategy, essentially" of guaranteed products and toward "a better balance" in customers between EMEA and the U.S.

"We used to be horribly imbalanced by having no US. distribution and no U.S. clients, and 65% of the investable assets in the world are in the U.S.," he said.

New offerings have included an emerging markets debt fund that has raised $5.3 billion since it was launched in April 2016. Like the group's undervalued assets and continental growth funds, the group acquired its emerging markets debt managers as a team from elsewhere, in this case, HSBC Global Asset Management.

The emerging market debt fund, which Ellis said has taken "very bearish" positions, has slightly underperformed competitors with a yearly performance of 2.3%. A Japan-based core alpha fund that is Man's largest individual strategy underperformed by 5.5%, while the U.K. undervalued-asset strategy outperformed its benchmark by what Ellis called "a remarkable 17.2%."

Man Group has acquired six businesses in the past five years, more recently real estate manager Aalto Invest in January 2017, which added $1.8 billion in assets under management. Ellis said, however, that as far as future acquisitions were concerned, the group would "finish one mouthful before you worry about the next one."

Private markets continue to be "an area where we're looking to grow," however, and opportunities for foreign fund managers in China are "vast," he said. In December 2017, Man launched an algorithmic quantitative fund managed from Shanghai and investing in listed futures, the first onshore hedge fund launched by a foreign investment company in China.