Active managers like to boast that they can play whipsawing markets to their advantage. But few asset managers have come out unscathed from the volatility of the past three years. Man Group is the exception.
Shares in one of the world’s biggest hedge fund managers are riding almost 50 per cent above the February 2020 price, when the UK stock markets entered bear territory on the eve of global lockdowns. Assets under management are almost $20 billion, or 16 per cent, higher over the past three years.
The FTSE 250 group’s tilt towards all-weather absolute return strategies, designed to perform during extreme oscillations in markets, has helped it to outperform. The recent dip in the shares underlines the risk in taking bets on macro moves, but it doesn’t erase the potential for Man to capitalise on volatility, which is likely to endure.
The hedge fund manager has benefited from taking bets on moves by central bankers to tame rampant inflation by raising interest rates. The rise in bond prices that ensued in the wake of the banking crisis earlier this month, as investors speculated that central bankers would hold off on tightening policy further, has hurt returns for some of its strategies. This month, three of its core absolute return strategies have seen returns knocked by an estimated 7-11 per cent, but they remain ahead on an annual basis.
But then the future direction of central bank policy is hardly clearly laid — rate-setters on both sides of the Atlantic pressed on with increases this week. It’s also not like Man’s traders subscribe to one house view either, which means fluctuations in bonds and stocks could help to produce better returns this year.
The aftermath of the banking crisis has knocked confidence but generating a chunk of revenue from performance fees has also depressed the shares’ earnings multiple. The market attaches little credit to performance fees, by virtue of a lack of predictability. The shares trade at just nine times forward earnings, a discount to rival UK-listed asset managers, which all have valuation multiples in the double-digits. That could invite a takeover bid. Its data/tech investing kit could attract a larger asset manager to take a punt, reckons the brokerage Numis.
Performance fees are charged on $60 billion of the $140 billion of assets under management. Last year performance fees of $779 million were the highest since 2008, at just under half of net revenue.
Wages are the largest single cost item, around half of which is variable remuneration linked to revenue.
Asset managers under siege from passive alternatives have been searching for alternative sources of income to mitigate fee pressure on their long-only strategies. The inverse is true of Man Group.
The acquisition of discretionary hedge fund manager GLG in 2010 not only added funds reliant on human investment skill to its computer-driven strategies but also brought long-only funds into the house. The takeover of Boston-based Numeric in 2014 beefed-up its diversification into these strategies. But higher-margin alternatives are dominant, making up two thirds of assets under management at the end of December.
Sparing acquisitions in recent years has left plenty of room for meaty shareholder returns. Last year the dividend was raised to 15.7 cents a share, which analysts expect to be held flat this year. Still, that would leave the shares offering a potential dividend yield of 5.2 per cent. Earlier this month management announced it would buy back $125 million in shares over the next 12 months.
Man could yet prove more worth amid a struggling asset management industry.
ADVICE Buy
WHYThe group could benefit from further market volatility later this year
OSB GROUP
Proving you can mine growth out of landlords has become a harder sell. That is one reason for the discount embedded in OSB Group’s share price.
Buy-to-let mortgages account for almost three quarters of the FTSE 250 group’s loan book. Rising borrowing costs have subdued demand across the market. The banking group is aiming for 5 per cent lending growth this year, which would be a comedown from the 12 per cent rise in the book last year.
It is not just the prospect of lower growth that has investors more cautious. There is also inherently increased risk of renters failing to make rent and landlords defaulting on their mortgage repayments.
For OSB, that stress hasn’t materialised yet. Impairment losses increased to 0.14 per cent of gross loans and advances last year, but that is still about the same level as pre-pandemic.
How resilient is OSB’s book in a crisis? Analysts at RBC Capital have done their own stress test, assuming there is a 10 per cent fall in house prices, all landlords default on their loans at once and the bank has to crystallise losses by selling foreclosed properties. Even in that unlikely scenario, OSB would suffer a gross loss of £110 million, the investment bank estimates, lower than the lender’s existing £130 million stock of impairment provisions.
OSB hasn’t been shy about handing back cash to shareholders, thanks to a high regulatory capital position. Alongside a 30 per cent increase in the ordinary dividend, a special payment of 11.7p a share was recommended and another £150 million in share buybacks.
The common equity tier one ratio of 18 per cent will reduce to around 14.2 per cent, after the share buyback is completed and Basel III regulatory changes are accounted for, analysts at Shore Capital calculate. That would still leave that capital ratio roughly in line with the lender’s own target of 14 per cent.
The likelihood of weaker underlying earnings this year means the ordinary dividend payment is expected by analysts to be lower, at 35.6p a share. That would leave the shares still offering a decent enough dividend, which looks secure enough for investors to remain invested.
ADVICE Hold
WHYA generous dividend yield that looks secure
