Annual Financial Report

RNS Number : 2287N

Man Group plc

08 June 2010

 



Man Group plc

In compliance with Listing Rule 9.6.1 and Disclosure and Transparency Rule 6.1.2, Man Group plc (the "Group") has today submitted to the Financial Services Authority ("FSA") two copies of each of the documents listed below:

1.       Annual Report and Accounts for the year ended 31 March 2010 (the "Annual                    Report")

2.       Notice of Annual General Meeting 2010 (the "AGM Notice")

3.       Form of Proxy for the Group's 2010 Annual General Meeting (the "AGM")

4.         Amended Articles of Association

These documents have been submitted to the UK Listing Authority, and will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility, which is situated at:-

Financial Services Authority

25 The North Colonnade

Canary Wharf

London  E14 5HS

Telephone  [phone]

In compliance with DTR 6.3.5 the following information is extracted from the Annual Report and should be read in conjunction with the Group's preliminary results announcement of 27 May 2010. The information reproduced below and in the preliminary results announcement together constitute the material required by DTR 6.3.5 to be communicated in full, unedited text through a regulatory information service. Page numbers and cross references in the extracted information below refer to page numbers and cross-references in the Annual Report.  The Annual Report and the preliminary results announcement can be viewed and downloaded at our website www.mangroupplc.com together with the AGM Notice.

Principal Risks and Uncertainties

A description of the principal risks and uncertainties that could have a material effect on the sustainability of our business are described below:

Investor Appetite

Extreme events in financial markets can cause a change in investor appetite for alternative investment products. Reduced investor appetite could lead to lower sales and higher redemptions of our fund products. Over 20 years of experience and long track record demonstrate our ability to deliver long-term cross cycle returns that are differentiated from the returns of other assets. We have a targeted set of products that offer investors a range of risks and returns depending on their risk appetite including some products with guarantees which ensure capital preservation.  Our investment in client services ensures that there is active and timely communication with investors to provide them with the appropriate information to make confident investment decisions.

Fund Performance

Negative fund performance results in lower funds under management and lower management fees, as well as reduced or no performance fees. It can also trigger the de-gearing of certain fund products, leading to lower investment exposure and further reductions in management fees.  Underperformance of fund products in a particular style compared with other investment products could also lead to increased redemptions and lower future sales, thereby reducing funds under management and management, as well as performance fees. To mitigate this risk we develop our private investor products with three important features: investment diversification through selection of leading investment managers, ongoing operational and risk management and robust analytical portfolio selection processes, and, in the case of guaranteed products, principal guarantees provide that the investors' initial investment will be returned at maturity.  As part of the initial and ongoing due diligence process the portfolios are tested against a variety of market conditions so that they remain resilient and robust across cycles. The guaranteed products, which comprise 35% of Man's funds under management have a principal guarantee component which gives the investor confidence to stay invested long-term and to withstand short-term market volatility.

For institutional investors we offer a wide range of investment products with different risk and return characteristics so that, as their investment risk appetite changes, they can switch products and stay invested. This product diversification together with interactive investor services helps mitigate the risk of increased redemptions in periods of poor performance.

In most financial years, the diversity of our product range reduces the likelihood of all products being in drawdown at the same time. If a simultaneous drawdown occurs, the magnitude and recovery time between styles results in a lower risk of a lengthy period before performance fees resume. Nevertheless we are more dependent on revenues from the managed futures style of alternative investments and AHL accounts for approximately 65% of Man's revenues and, therefore, our earnings are particularly sensitive to the performance of this family of funds.  Market environments in which there are no clear trends in asset prices have an adverse effect on AHL performance.

Risk management process in the investment manager

If the investment managers fail to perform the risk management services on behalf of the fund products effectively, Man could be exposed to litigation risk and reputation risk.  This risk is mitigated by strong risk controls and due diligence procedures which are applied in the due diligence processes of manager selection, portfolio construction and ongoing risk monitoring. Risk management personnel, independent of the investment Managers, have risk management responsibility to monitor that the risk management process operates appropriately within the investment manager and in accordance with the investment management mandate. The increased use of managed accounts enables the risk management process to be performed at the security and investment strategy level thereby enhancing the detail to which the monitoring and risk management process can be performed.

Product profitability

We operate in a competitive environment and therefore are subject to market dynamics which could lead to a reduction in historical product profit margins. Our business model, however, gives us flexibility to mitigate the effects of this risk. Our focus on top quartile investment management capacity aims to deliver out-performance by our products as a result of which they enjoy continued demand by investors. The provision of quality investor services in the form of investment reporting and research are value adding services for investors in our products. We constantly look to develop new investment opportunities and to develop new products so that we can ensure that the breadth of our product range is differentiated and attractive to

potential investors.

The costs of our distribution network, comprising our institutional sales force and our distributors, are variable costs linked to sales volumes and funds under management. A significant portion of our compensation cost base is represented by discretionary bonus which is variable with the Group's financial performance. Tight budgetary controls exist in the business to ensure that increases in costs are matched to corresponding increases in sales and revenues. The overall variability of our cost base allows us to react quickly to short and medium-term downturns to preserve product and profitability levels.

Investor concentration

We distribute our products to a broad range of institutional and private investors across the major regions of the world. We mitigate investor concentration risk through the continued growth and diversification of our distribution network, and through having a breadth of products targeted to different segments of the market.

Approximately 68% of our funds under management are from private investors and 32% from institutional investors. We maintain offices in our major markets to ensure close contact with our investors and distributors.  We select distribution partners that have global size and scale or a local leadership position. Our distributors are the largest financial institutions, wealth advisors and brokers. We currently have over 2,200 distributors globally. The top 10 distributors account for 38% of private investor funds under management.

Our institutional investors are geographically dispersed and are among the largest banks, pension funds, insurance companies and asset managers. We have over 200 institutional investors. The top 20 institutional investors account for 74% of institutional funds under management.

Our largest institutional investors often have multi-year agreements with regards to specific capacity and fees. As these agreements expire and are renegotiated, funds under management and/or fees may be reduced. Through the continued performance of our fund products, our ability to offer unique access to investment management capacity and quality client services we endeavour to retain these investors and the level of fees.

Regulatory changes

Regulatory authorities globally are actively considering changes to the regulation of the financial sector in the aftermath of the financial crisis. Regulatory changes may affect the alternative investment management sector either directly or indirectly through, for example, reducing the risk appetite of the counterparties to our fund products. Such changes could also increase the costs of structuring, distributing and managing fund products. Regulatory changes could also increase the capital that counterparties are required to hold for exposures to certain hedge fund products.  This could adversely affect the availability and cost of funding for such products and also affect trading in various markets in which our fund products invest.

We operate in a highly regulated environment and therefore constantly monitor that our products and sales practices are compliant with regulations. Our dedicated regulatory and compliance teams provide us with an infrastructure and source of competitive advantage as they enable our products to be robust and provide us with speed to market for our new product launches globally. The diversity of our product offering and geographical spread of our investor base also mitigates the effect of some regulatory changes.

Reduced financial leverage and increased cost

In the current market environment there is a risk of a reduced appetite of financial counterparties to provide financing to support the leverage in fund products. Reduced availability of or increased cost of external financing could reduce the returns on certain fund products. It could also increase the potential demand for Man to provide funding to these fund products.

At the year-end drawn external finance leverage was $2.6 billion, with a further $1.2 billion available.

To mitigate this risk we facilitate a process whereby the fund products borrow directly on a basis that is recourse only to the assets of the fund product and on defined maturity terms. The financing is provided by a wide group of large financial institutions many of whom also distribute the products and hold the principal guarantees. The financing process is managed

so that maturity dates of the financings are staggered. These fund products are designed to operate within defined liquidity parameters so that external financing is provided to the products on a dynamic basis. If the fund product were to incur a significant performance loss the fund would be systematically de-leveraged to preserve the investors' capital which is subordinate to the financial counterparties' lending.

The cost of financing is included in the performance of the funds, if this cost increases, investment managers may have to reduce leverage or seek alternative trading strategies. In addition, we can issue many of the structured products in an open-ended, unleveraged format if required. The use of managed accounts by our investment managers assists in the rational optimisation of funding within the fund product. In addition, our strategy of combining managed futures (which trade on margin) with other investment styles allows for the efficient provision of leverage into the products.

These strategies mitigate the effects of short and medium-term decreases in financing appetite and the impact on performance of the cost of leverage.

Fiscal changes

The fiscal treatment of alternative investment products varies by jurisdiction. In certain jurisdictions the current fiscal treatment of the products does not make them attractive for private investors when compared to traditional investment products. As a general trend we continue to see the tax authorities in certain jurisdictions moving towards treating alternative investment products on the same fiscal basis as traditional investment products.  This trend is favourable to our business, however it is possible that it could reverse and negatively impact the growth of our business.

As a global leader in investment management we develop products to meet the specific

requirements of investors in different regulatory and fiscal jurisdictions. Our structuring,

compliance and legal teams are located in the major regions to ensure that our products are continuously compliant. As a result we have a range of on-shore and off-shore products suited to meet the fiscal and investment needs of our private investors. The breadth of our products and global spread of our investors and our worldwide distribution capability mitigates the financial effect that a negative change in any particular jurisdiction might have. 

Loss of key individuals

Our people are a key asset. There is a risk that key individuals leave the business resulting in a loss of knowledge or expertise. To enable our people to understand their career potential we have an active performance management and succession planning process in place. We have a strong employer brand which means that when we have to recruit from outside the Group, our leadership position within the industry makes us a preferred employer.

Attracting the best talent, motivating them to excel, retaining them and ensuring that they progress in their careers is fundamental to the sustainability of our business and our leadership position.

The size and scale of our distribution network, the span of our investment management

capacity and the breadth of our product range reduce our reliance on any key individuals to generate performance. Our management has significant expertise in each of their respective areas. They also understand, as a cultural imperative, the need to identify and advance the next generation of leaders through succession planning and mobility. Many of our investment managers have a history of success over a 20 year period each driven by successive strong leadership.

Related party transactions

(a) Transactions and balances with related entities

During the year the following categories of related entity relationships occurred:

Entity type	Description of relationship	Description of transactions
Associates and joint ventures	Investor and trading adviser	Seeding and liquidity investments, loans to fund products, external re-financing guarantees, asset management performance,  management and other fees, brokerage commissions, and interest and dividend income.

Transactions with related parties included in the income statement during the financial year, excluding key management compensation were as follows:

	2010 $m	2009 $m
Asset Management:     Performance fee income      Management and other fee income	5 440	122 336
	445	458

All transactions between related parties are carried out on an arm's length basis.

Year end balances arising from transactions with related parties during the financial year, excluding key management compensation are as follows:

	2010 $m	2009 $m
Receivable from related entities	169	99

 (b) Key management compensation

The total compensation and other benefits to those directors and employees classified as key management, being those having authority and responsibility for planning, directing and controlling the activities of the Group, are as follows:

	2010 $000	2009 $000
Salaries and other short-term employee benefits Post-employment benefits Share-based payments	6,670 1,885 (3,508)	17,983 906 10,800
	5,047	29,689

The performance-related share awards given in prior years were re-assessed in the current year such that the probability of vesting has substantially reduced to minimal levels. As a result the charges raised in prior years were reversed in the current year in accordance with IFRS 2.

Directors responsibilities

Each of the directors, whose names are listed in the Annual Report, confirm that, to the best of their knowledge:

·      the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU and the parent company financial statements as prepared under UK GAAP give a true and fair view of the assets, liabilities, financial position and profit of the Group; and

·      the management report contained in the Business Review includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

Enquiries

David Browne 

Head of External Relations 

[phone] 

 [e-mail] 

Miriam McKay

Head of Investor Relations

[phone]

[e-mail]

Simon Anderson
Global Head of Communications
[phone]
[e-mail]

Robert Clow
Senior Communications Officer
[phone]
[e-mail]

Maitland PR

George Trefgarne

Philip Gawith

 [phone]

 

END

 

 

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