When it came to improving Britain’s biggest hedge fund operator, Luke Ellis was the man with the plan. The chief executive of Man Group has been at the controls of the hedgie now for five years, having joined the turnaround team led by Manny Roman in 2010.
The business he joined was a bureaucratic mess, over-reliant on the flagship AHL fund and suffering heavy redemptions as investors pulled their money out. Roman had just bought hedge fund GLG Partners to smooth the volatile performance.
The turnaround team bought new businesses to diversify and grow in the US and has invested heavily in technology to grow its computerised trading “quant” funds — whose buying and selling strategies are calculated by algorithms rather than humans. There’s an irony to that: a key reason to buy GLG was to diversify away from Man’s quant-dominated business, bringing in more “star” fund managers of the human kind. Now, Man Group is dominated by its computer-driven funds.
For shareholders, the beauty of the quant business is that once the algorithm is built and proven to work, overheads are low with no star fund managers to pay. So profits are high if you can persuade people to invest.
Man’s funds’ performance has been pretty good for the past three years, helping it to win more customers. Quarterly figures last week reported very strong inflows of funds — $5 billion — from customers looking for alternative investment strategies. Ellis said that he expected more to come in the final three months of the year. In fact, the third quarter saw Man suck in more new money than in any quarter since Ellis arrived.
It’s not just the size of the new business that makes Man a compelling stock to hold. It’s also the type of business.
Man used to rely on selling its products to rich individuals through the wealth-management arms of big European and Japanese investment banks. However, such customers proved fickle after the financial crisis and Man shifted towards targeting major institutional investors — insurance companies, life insurance funds, sovereign wealth funds and the like.
Such sales tend to generate lower profit margins because big, smart investors negotiate hard on fees. However, they also tend to be less prone to pulling their money out, making for a healthier business long term, analysts at Panmure Gordon argue.
Investors have been waking up to the Man story and the shares have been strong this year. But they still trade at a discount to the sector and should have further to go. Buy.