Spreadbet Magazine’s top 3 picks for 2013
So, absent an immediate return to being able to generate performance fees on its main fund, Man has been reliant on its other more traditionally managed hedge funds from the GLG acquisition of 2 years ago. Again, performance has been relatively lacklustre here as many active fund managers struggle in an environment of “centrally planned” macroeconomics with “Helicopter” Ben Bernanke at the helm of the levers of global economic power. This has led many in the City to now question the security of tenure of current CEO Peter Clarke. Indeed, at the time of writing it looks like his head is to roll and he will be replaced by current COO Emmanuel “Manny” Roman who joined from GLG.
“As is usually the case, the City analysts are well behind the curve.” As is usually the case, the City analysts are well behind the curve and from collectively calling the stock a buy when the shares were over 500p, certain of them now have price targets of 50-60p which they deem to be the liquidation value of the company. We take issue with this as the rule of thumb in the industry is that so called AUM (Assets under management) are valued at around 3%. Assets under management have fallen from $75bn to $52bn over the last 18 months and the company currently sits with net cash of around £300m. In fact, so strong is their balance sheet that the group has actively been buying back their debt in the capital markets. Taking the low end value of AUM of 2% together with total cash resources available in a liquidation gives a floor value of around 70p per share — pretty much where we are now. One individual with a stellar record in assessing value within the financial industry is Odey Asset Management head Crispin Odey who, together with his wife Nichola Pease, are known as “the Posh & Becks of the City!” After an illustrious career spanning over 20 years in the fund management industry, Odey cemented his reputation in the depths of the Great Financial Crisis through shorting both Northern Rock and Bradford & Bingley and making millions in the process for him and his investors.
Odey recently popped up on Man’s shareholder list with a 5% stake in the company, likely bought around the mid 80p’s. In short, if history is any guide, then Odey certainly knows his onions and patently believes there is value in Man at the current price. I personally am more inclined to follow his lead than the analysts who are advocating to sell the stock some 80% lower than when they were buyers!! So what could be a positive catalyst for Man? In the first instance a return to “normalcy” in the markets where trend following once again works. The market goes through cycles and for the last 5 years it has been a “trader’s market” — buy and hold on any measure beyond several months has resulted in give back in many asset classes. However, trend following will come back into vogue and work again once more — it is one of the oldest investing techniques there is. When this occurs, AHL should do well again. Once the high watermark is taken out, then the money creation starts once again as performance fees drop down to the bottom line and the operational leverage inherent in the business structure of hedge funds kicks in again. There will be a double kicker too in such a scenario as the cost cutting in recent months that has been occurring at Man will additionally flatter profits. Secondly, although I doubt Odey would be able to muster the fire power to launch a bid for Man himself, he is probably weighing the chances of another peer taking a pop at Man, particularly following Clarke’s likely departure. $50bn of funds to play with is no small sum and this has got to be attractive to the likes of BlackRock and others and so, there is in our opinion, a better than evens chance of an approach over the next 12 months. Finally, given the robust balance sheet of the Group, then absent a serious incremental withdrawal of funds under management, we doubt the dividend is likely to be cut materially. To be sure a halving of the dividend is possible, but still this would result in a yield of approaching 8%. Such a high yield is therefore likely to act as solid support at current levels. To conclude, we think the stock to be now trading at or close to liquidation value and also being supported by the dividend yield (even if cut). We again have what is a positive risk:reward skew in the stock given the potential catalysts for a re-rating.
January 2013
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