Man Group (LSE: EMG) was originally founded as a sugar cooperage and brokerage by James Man in 1783. For nearly 200 years, the London-based firm had the contract to supply rum to the Royal Navy. Today, it is a global hedge fund group listed on the FTSE 250 with over $150bn of assets under management.
There aren’t many firms with a history as rich as that!
Here’s why I think the stock is an ideal candidate for passive income.
Tech-driven company
First, what exactly are hedge funds? Well, these are pooled investment funds that typically have the freedom to use a wide variety of risk-management techniques. Unfortunately, they’re generally only accessible to the wealthy, with most stipulating a minimum £1m investment.
My humble portfolio is still some way short of £1m, so this stock would provide rare exposure to an exclusive corner of the investing world.
Another thing I like is that the company is very forward-thinking. For example, it has a long-standing partnership with the University of Oxford in the form of the Oxford-Man Institute. Here, quantitative finance researchers study machine learning techniques and their applications to investing.
The idea is to harness this academic research to give its investment management businesses an edge in their quantitative trading strategies. That is, the use of mathematical models and algorithms to spot mispriced financial securities.
Performance fees
One risk to consider here is that a poor run of form can cause the group’s performance fees to drop off a cliff.
Indeed, we saw this in the firm’s latest H1 results. Revenue fell 40% year on year to $513m while pre-tax profit plunged 65% to $137m. Performance fees dropped 90%, which management said was “the result of the sharp reversal in markets around the March banking crisis”.
Nevertheless, the group saw net inflows of $2.6bn during the period, boosting its managed assets to a record $151.7bn. These inflows were 2.5% ahead of the wider industry, highlighting how popular its strategies are.
Now, another risk with quant funds, as they’re known, is that they can get too big. Once that happens, any market mispricing their computers detect can disappear before they can make much money. However, I don’t think this is a problem for Man Group’s funds yet.
Passive income generation
Next year, the firm is forecast to pay a dividend equivalent to 14p. With a share price of 205p, that equates to a forward dividend yield of around 6.8%.
That means I’d need approximately 7,200 shares to generate £1,000 a year in passive income. Those would set me back around £14,780.
Obviously, that’s quite a lot of money, especially when no dividend is every truly safe. But I’m encouraged that the payout is covered almost twice by anticipated earnings. And the company has consistently paid a dividend for almost 30 years!
Moreover, the stock currently trades at around eight times next year’s expected earnings, which is a significant discount to its long-term average.
Perhaps that is why 10 of the 14 analysts covering the stock currently rate it as a ‘buy’. None have it down as a ‘sell’. That’s a solid vote of confidence in my book.
So, if I had money to invest today, I’d buy this cheap FTSE 250 stock for attractive passive income.
