With hedge fund managers under regulatory scrutiny as part of the fallout from the credit crunch, investor sentiment appears to be against companies like this one.
One could be forgiven for thinking that hedge funds were conceived in order to profit from the markets whatever conditions might be, whether up, down, sideways or static. And so the story goes, but not when all possible conditions come at once it would appear!
To be fair, FTSE 100 listed Man Group (LSE: EMG), which describes itself as 'a world-leading alternative investment management business', has not slipped into loss making over the last couple of years, but it has found it more difficult to make a profit.
Tough times
Since spinning off its brokerage business onto the New York Stock Exchange in 2007, Man has become pretty much a pure play on investment fund management. But since the heady days of 2007, global markets of just about every type have been in turmoil and hedge funds have found it hard to turn a profit with boomerang pricing reversals, volatility and chaos being the order of the day.
On top of all that, the financial industry has come sharply into focus on both sides of the Atlantic, with our own Financial Services Authority (FSA) looking at the possibility of fundamentally changing the way that banks and investment companies are regulated.
The net result of all this is that hedge funds have become less popular with both institutional and private clients and funds under management at Man have fallen to around $38bn from a peak in 2008 of around $69bn.
The company's shares are about as popular as yesterday's socks, too!
Cheap
Perhaps due to the poor sentiment that surrounds the industry, Man Group appears to be displaying a few undemanding metrics at the current 207p share price level.
For example, in the last final results statement to 31 March 2010, the balance sheet showed net tangible assets of around $2,852m or 108p per share -- not a world away from the current share price.
Furthermore, the enterprise value to free cash flow ratio comes in at around 4.5, and the company is providing a decent return on equity of around 11%, with the $445m profit shown in this reporting.
The attraction continues with the recently rebased dividend yield of around 7% but, admittedly, this is only covered around once by earnings, so it could be threatened if earnings fall going forward.
Despite the attractive looking figures, we are still valuing Man on earnings, which are backwards looking and could disappear in a flash, just like a retail investor's spread betting account balance.
If the next set of figures show a degeneration to break-even, or worse, to loss-making, we could see further downwards pressure on the share price.
Looking ahead
Putting gloomy scenarios aside, the directors sound quite bullish. In an interim management statement issued on 8 July, the chief executive said this when talking about AHL, its trading arm:
"The quarter to 30 June has seen a return to increased volatility and uncertainty in financial markets. Against the backdrop of falling equity markets, with world stocks down 11.6%* in the quarter, it is pleasing to see AHL generating a positive return of 0.9%** over the same period. However, given the continued market uncertainty, sales in the quarter have, as anticipated, remained subdued. "
There is a continuing strategy of focusing on investment management with the acquisition of a company called GLG Partners Inc. Of this, the CEO says:
"With continuing performance and an exciting acquisition to expand our business, we are strongly positioned to deepen our product range across markets and accelerate asset raising."
Man earns its income with management fees that vary with the level of funds under management, and performance fees that vary with the funds gains or losses. It is the latter that can provide the big bucks, and which have fallen off a cliff in recent years.
If Man can pull off the double whammy of stemming the flow of redemptions from its funds and improving its funds performances, we could see upside for the share price. This could be helped by any easing of volatility or perhaps a new bull market, which would help to float all boats -- including those of hedge funds!
In the meantime, there is that lightly covered dividend to help console holders of the shares.
More from Kevin Godbold:
> Kevin holds Man Group shares.
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