It’s not immediately obvious why the world’s largest listed hedge fund manager sponsors the Man Booker literary prize. While there are plenty of creative minds at Man Group, there can be little in the way of fiction. If there was, of course, investors would be pushing the “sell” button as quick as you like.
The attraction of Man for a stock market investor is that it should offer exposure to the kind of high-performance hedge fund strategies that would otherwise cost you tens of thousands of pounds to get into directly. Man is also a considerably more diverse asset manager than it was, so theoretically there should be the additional cushion of more conventional buy-and-hold strategies and investments in emerging markets and debt securities.
Though hedge funds promise us that their assets are “uncorrelated” with traditional investments, the truth is more nuanced and they can suffer just as badly when big macroeconomic events, interest rates or markets take us by surprise.
Like the species, Man has evolved, often painfully, since it was founded in 1783 by James Man as a sugar trader, before expanding into other commodities, such as coffee and cocoa. Listed in 1994 as ED&F Man, it began to assume a shape more akin to its current form in 2007 when it floated its brokerage arm in New York. Its acquisition three years later of GLG Partners both bulked up its hedge fund assets and brought in more traditional long-only funds. It has made other strategic acquisitions along the way including, in 2012, of FRM, where Luke Ellis, its current chief executive, used to work.
Evolution became revolution for Man six years ago. After two years of chronic underperformance at its AHL Diversified fund, Man was haemorrhaging assets, the fees were falling, the share price was sliding and shareholders had had enough. Out went the chief executive Peter Clarke and in came Manny Roman, the former Goldman Sachs banker and GLG executive, who is Mr Ellis’s predecessor.
Mr Roman set about rebuilding the funds, cutting gearing, shoring up performance and restoring the confidence of investors. The stability he created was writ large in Man’s first-half results yesterday. Profits, sales and the half-year dividend were up, despite the backdrop of turbulent markets. Man’s pre-tax profits from management fees were nearly 28 per cent higher at $120 million and, while performance fee profits were 35 per cent lower at $33 million, in the pre-Roman era they would have been non-existent.
This is because falling performance at the likes of AHL, and other funds that place bets based on macroeconomic factors and trends, was offset by stronger performance in, for example, long-only strategies and emerging market debt funds.
Where Man was previously much more vulnerable to the investment vagaries of individual investors, some 80 per cent of its money now comes from institutional investors, which tend to be more patient.
In a world where asset managers are grappling with how to adjust to the rise of passive, index-tracking investing, Man is unashamedly an active manager. Its shares are not expensive, trading at about 11.7 times last year’s earnings, and it has a yield of getting on for 5 per cent. The shares, up 10½p to 184p yesterday, have struggled this year, down more than 15 per cent since February when financial markets were gripped by a brutal sell-off.
Like all asset managers, it is not without risks; sustained performance missteps and the departure of key managers could unsettle both its customers and shareholders.
Man’s shares are way off their peak of 628½p before the financial crisis and growth in the future is likely to be steady and gradual, rather than stellar, but the shares are certainly worth holding while you wait.
Smurfit Kappa
The Dublin-based maker of paper and packaging comes conveniently wrapped in takeover speculation. Smurfit Kappa is a big player in one of the hottest sectors of the moment, and one that is consolidating frantically to boot.
Indeed, it is less than two months since Smurfit shook off the bid advances of International Paper of the US and it has made an acquisition of its own, of Reparenco, a Dutch paper and recycling business, for €460 million. The roots of Smurfit Kappa date to 1934 but it was created in its present form in 2005 through the merger of Jefferson Smurfit and Kappa Packaging. Its products include the boxes that shoppers see on supermarket shelves and the cardboard packages that are used to deliver our online orders.
Employing about 46,000 staff across 35 countries, it designs and makes paper and packaging, but it also owns forests, paper mills and recycling centres. Smurfit is also listed in Ireland but its London quote values it about just over £7.4 billion.
The packaging industry is enjoying a growth spurt, driven by the rise of online deliveries and the move away from plastics. There was evidence of this in Smurfit’s first-half results yesterday, with a 5 per cent increase in statutory revenues for the six months to the end of June and an underlying rise of 8 per cent.
Pre-tax profits were up 70 per cent and the margin and return on capital were both much improved. Debts and leverage were also lower, and all these things are testament to Smurfit’s improved efficiency.
With the sector in vogue and takeover talk rife, the big question for investors is which company to favour. Smurfit’s main listed rivals are DS Smith and Mondi, both of which are also involved in the plastics business, which would prove to be an advantage if a recyclable material was developed.
All three businesses are developing new products and have high-quality earnings and plenty of growth potential. Using the cold measures of price and yield, Smurfit Kappa is more expensive than both Mondi and DS Smith for a similar return. It may not stay that way, but at the moment the others offer better value.
