Annual Financial Report

RNS Number : 0120I

Man Group plc

07 June 2011

 



Man Group plc

In compliance with Listing Rule 9.6.1 and Disclosure and Transparency Rule 6.1.2, the following documents have been submitted to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do

1.       Annual Report and Accounts for the year ended 31 March 2011 (the "Annual Report")

2.       Notice of Annual General Meeting 2011 (the "AGM Notice")

3.       Form of Proxy for the Group's 2011 Annual General Meeting (the "AGM")

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 final results announcement of 26 May 2011. The information reproduced below and in the final 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 final results announcement can be viewed and downloaded at our website www.mangroupplc.com together with the AGM Notice.

Principal Risks and Uncertainties

In this section we highlight the key developments and priorities in risk management at Man over the past year. We continue to take the approach of identifying each risk across the firm and assessing its likely impact. We measure and monitor the size of our risks, and implement controls and transactions to reduce and hedge exposures in order to ensure that they stay within our firm-wide risk appetite framework. We regularly report on the status of these risks to senior management and the Board via a well established governance structure.

Risk appetite

Following the acquisition of GLG, we have taken the opportunity to refresh and update our Risk Appetite Statements in the first quarter of 2011. These are set by the Board, as highlighted in the Chairman's statement in this report, and cover risks as they apply to both the Investment Management functions, and Man Group itself.

1) For Investment Management risks (i.e. risks to fund investors), key areas addressed by the Risk Appetite Statements include:

i) compliance with investment mandates,

ii) maintenance of liquidity of investments in order to be able to meet contractual terms,

iii) management of the portfolio in line with external financing terms when applicable, and

iv) management and mitigation of counterparty risk.

There is also a focus on managing the firm's governance processes to avoid the occurrence

of fraud events (both internal and external), and to minimise the risk of operational losses.

Given the broad range of Man's investment functions, across Man Multi-Manager, AHL and

GLG, the methods of implementation of these principles within each function will vary, but with

a consistent underpinning.

2) For Man Group risks (i.e. those that affect shareholders directly), the Risk Appetite Statements cover both Quantitative and Qualitative risks as they affect the firm's risk profile.

Statements relating to Quantitative measures of risk include:

i) maintenance of positive net income,

ii) management of risk taking activity in the Man balance sheet via a capital and liquidity

framework,

iii) adherence to the terms of Man's external financing arrangements

There is also a schedule of specific allowances for certain activities (e.g. loans to funds and

seed capital) that are controlled under a range of "mandate and scale" limits.

Qualitative Risk Appetite Statements principally address:

i) avoidance of unresolved conflicts of interest between Man and investors

ii) risk of material consequences from the loss of key personnel, and

iii) minimisation of reputational risk

Balance sheet management

Following the acquisition of GLG, we have considered our alternatives around the management of our capital and liquidity base, given the changed profile of the balance sheet.  As summarised in the Chairman's section of this report, we have used a risk based approach in considering the possibilities for capital deployment into organic growth opportunities and selective proprietary positions in support of the investment management businesses.

We have also reviewed the potential for use of Man's liquidity resources in the future in a possible stressed environment, and used this as input into planning our Treasury funding needs

for the combined group. 

The consequences of this analysis and framework is that we will be able to make efficient decisions around the use of both capital and liquidity resources over the coming years, taking

into account the new risk profile of the group balance sheet following the acquisition of GLG.

The current position of the firm with respect to capital and liquidity management is shown in the

Financial Review (Notes 17, 21 and 22).

Man principal risks

In the course of 2010, and looking ahead to 2011, there are a number of specific principal risks that we have sought to manage - these are explained below, together with mitigating actions that we have established.

1) Integration risk

Through the integration of the Man businesses with GLG, we have been conscious of the need to assess and manage a range of risks across human resources, operational controls, technology and compliance, as the relevant functions have been combined.

These risks included:

i) Risk of loss of staff

ii) Risk of control weaknesses from changes in organisational structure

iii) Risk of technology failure as systems were integrated

iv) Risk of governance processes being incorrectly structured for the combined firm

An integration committee, with senior management membership, was established in mid 2010, and reported regularly to the Risk Assurance Committee on the progress in identifying and mitigating a wide range of specific risks - a process that is now largely complete. Going forward, the integration risks will be addressed within ongoing functional risk management.

2) Fund underperformance risk

A principal risk to Man shareholders is the risk of the underperformance of the funds. Persistent

underperformance would likely result in reduced levels of funds under management (FUM) and

consequent lower management fees, as well as reduced performance fees.

In mitigation of this risk, we maintain a high quality, diversified range of investment styles

and products, principally across quantitative (AHL), discretionary (GLG) and funds of funds

(Man Multi-Manager) strategies. This diversity gives us protection against concentrated underperformance from any one sector. We develop our products for both private and institutional investors with an eye to a diversified mix of investments, with significant resource devoted to portfolio selection, and operational due diligence in Man Multi-Manager.

With respect to our guaranteed product range, we test the portfolio of underlying investments

against a wide range of market conditions, so that the products remain robust through market

cycles, and thereby ensure that the investor can remain invested for the long term in the face of

short term market volatility.

Our largest exposure to this risk remains with respect to the managed futures style and the

AHL family of funds, given that this forms a significant part of our revenue base. In general,

AHL will tend to benefit in markets with strong underlying trends.

3) Discretionary trading risk

A key area of risk management in 2010 has been the integration of the GLG investment risk

management function into the combined firm. Given Man's primary investment activities have

in the past focused around AHL's quantitative strategies and the Man Multi-Manager fund of

funds businesses, the controlled investment risk management of discretionary trading is a new

activity from Man's perspective.

There is a well established team of risk managers within GLG who monitor positions against trading limits across a range of metrics including Value at Risk, position concentrations, stress events, scenario analysis and liquidity measures. Using internally developed risk management software, the team are capable of monitoring risk attributes both pre- and post trade throughout the day. A structured approach to limit setting, on top of the risk transparency made available through the software, allows the Investment Manager to be conscious of the portfolio risk dynamics and most importantly be comfortable with the risk exposures within each portfolio throughout the day. This team has an independent reporting line separate from the trading function, and is able to provide control and challenge on risk issues at a detailed level and across the varied investment strategies offered by GLG.

In terms of oversight, the GLG Risk Committee, whose membership comprises the Chief Risk

Officer and Chief Operating Officer for Man, the head of GLG investment risk and senior GLG

traders, meets bi-weekly to review investment performance and risks as well as strategies

and topical issues in the light of current market conditions. These processes provide risk control

and oversight to the activity of the GLG trading desks, as well as providing transparency to

Company wide management.

4) Operational risk

During the course of the year, we have continued to further develop our existing operational risk framework and processes. A failure in this area could adversely affect the business and the prospects for Man Group, and we consequently look to identify, control and mitigate these risks across a broad range of scenarios, and covering the integrated business. Following the GLG acquisition, their existing operational risk function as well as their operations and technology functions have been integrated into the broader Company.

From March 2011, Man Group has outsourced certain fund related activities, primarily shareholder servicing for retail clients - this decision was taken after a careful operational

risk assessment and the implementation of a comprehensive oversight model. We believe

that in aggregate, this change will result in lower operational risk for the Company and our

fund investors, as well as a superior and cost efficient service.

We continue to reassess our exposures to operational risk, and hold appropriate capital as assessed using a broad range of scenarios, which are reviewed regularly via the Risk Assurance Committee. These scenarios span both losses from potential failures in operations and technology, and those from possible litigation risks.

5) Regulatory risk

The global regulatory agenda is evolving. Proactive management and assessment of these regulatory changes is key to Man's continued ability to meet the expectations of investors and regulators around the world, whilst allowing us to maximise any opportunities that may arise.

In the wake of the financial crisis (and particularly the banking crisis), regulators globally continue to reassess and search for solutions to create a more stable long term framework for the world's financial system. This process (as described by Manny Roman on page 29) has led to proposals which impact the hedge fund industry. Within Europe there has in particular been continued progress on implementation of the Alternative Investment Fund Manager Directive (AIFMD), and we continue to take an active role in shaping the outcome.

Regulators across the globe are developing architecture around areas including product

selling and advice, central clearing, position limits, bringing products on exchange and remuneration. We are supportive of proportionate and considered regulation and given that we operate regulated entities in many jurisdictions around the world, we are encouraged by the increased co-ordination of authorities to find global solutions where appropriate.

Following Man's acquisition of GLG, Man has integrated the Man and GLG Compliance functions into one unit, comprising individuals with experience across the entire range of

compliance topics that affect our enlarged business. The team's activities span such

activities as licensing, advisory, monitoring, approvals, policy, training and projects on areas

such as corporate, distribution, marketing, investment management and trading, investment

advice and anti-money laundering measures. The Compliance team also manage the Group's

relationships with regulators, including the Group's lead regulator, the UK Financial Services

Authority (FSA). 39 entities with the Group are currently licensed by 22 financial regulators

and self-regulatory organisations (SROs). The ongoing activities of the Compliance function

form part of the Risk Assurance Committee agenda, ensuring senior management familiarity

with current issues.

Risk management is an essential component of maintaining a high quality, sustainable business for our stakeholders. Man's Legal department has an integrated role in managing legal and regulatory risk through its involvement in all material aspects of the business cycle. This integrated role enables Man to navigate through the increasingly complex global legal

and regulatory framework in a thorough and responsive manner.

6) Reputation risk

Successful investment management is highly dependent on building and preserving a

successful corporate reputation. For Man, key aspects of reputation management include the culture and values of the Company, and the way these drive behaviour; branding, corporate

sponsorship engagement with the communities in which we operate; our strong relationships with regulatory authorities globally; as well as the entirety of our risk management and corporate

governance frameworks.

To this end we seek to ensure that integrity is respected as a core value across Man's employee base and business functions, through specific focus within our performance management process, adherence to compliance and risk management across the firm, and through the leadership of senior management to ensure that all conflicts and issues are managed

appropriately. Our focus on integrity delivers a variety of business benefits, from securing large

institutional mandates such as BVK to winning PwC's Building Public Trust Award for our 2010

Annual Report.

Following the acquisition of GLG, we have created a brand hierarchy which recognises the

strength of the overarching Man brand, but also of the AHL and GLG investment management

brands. We continue to sponsor the Man Booker literary prize, and have a global programme of

community engagement. PG 52

Regulatory expertise, risk management and corporate governance are key areas of focus for

the Man Group Board. PG 80

7) Key person risk

We recognise that we employ a talented array of individuals across our businesses, and view both their retention and the continued recruitment of additional professionals as a key priority for

the future success of the Company. We aim to utilise our leading position in the hedge fund

industry, together with a consistent performance management process and experienced senior

management and leadership, to achieve this. We constantly aim to attract the best talent within the industry, and the historical strength of both the Man and GLG brands is a key factor in helping us to achieve this.

We operate a large distribution network and investment management capability, as well as

a wide range of products, and thereby have resilience to the loss of particular key individuals.

We also have a well established succession planning process in place.

Related party transactions

Related parties comprise key management personnel, associates and joint ventures. Transactions with related parties include 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.

Total revenue earned from fund entities deemed to be associates, included in the Income Statement during the year was $314 million (2010: $445 million) and at 31 March total fee receivables and loan balances with fund entities deemed to be associates totalled $41 million (2010: $169 million). In addition, Man had entered into committed purchase agreements totalling $67 million (2010: $228 million) with fund entities deemed to be associates.  All transactions with related parties were carried out on an arm's length basis.

Below are details of income earned from equity accounted associates and explanation of the disposal of BlueCrest, an associate, in the year.

Investments in associates and joint ventures

	2011 $m	2010 $m
At beginning of year Currency translation differences Disposal of BlueCrest Share of post-tax profit Dividends received Impairment of Ore Hill	351    13  (227)    65 (112)   (22)	317   11     -   70  (47)     -
At 31 March	68	351

At 31 March 2011, investments in associates and joint ventures carrying amount primarily relates to a 25% interest in Nephila Capital Ltd., an alternative investment manager specialising in the management in funds which underwrite natural catastrophe reinsurance and invest in insurance linked securities and weather derivatives.

Associates are entities in which Man holds an interest and over which it has significant influence but not control. Joint ventures are entities in which Man has joint control through contractual arrangements. Investments in associates and joint ventures are recorded by the equity method of accounting and at cost plus (or minus) our share of cumulative post-acquisition movements in undistributed profits (or losses). Our share of post acquisition distributable profits or losses, net of taxes is recognised in the income statement, and our share of post-acquisition movements in reserves is recognised in reserves. Gains and losses on transactions between the Group and its joint ventures and associates are eliminated to the extent of the Group's interest in the entities.

Where Man has investments in certain fund entities over which it is able to exert significant influence but not control, these are classified as associates.

Man has applied the scope exclusion within IAS 28 'Investments in Associates' for mutual funds, unit trusts and similar entities and has classified such holdings as investments and measured them at fair value through profit or loss. 

Summary financial information of our associates has not been provided as it is considered excessive in length and is not considered meaningful. Details of all associates will be annexed in the Company's annual return.

BlueCrest Capital Management

The interest in BlueCrest Capital Management LLP (BlueCrest), previously reported as an associate, together with the existing loan note was sold on 21 March 2011 for $533 million of cash and $100 million par value new loan note. A gain of $257 million has been recorded on the sale of the equity interest and a gain of $11 million has been recorded on the repayment of the loan note in finance income in the Income Statement. In 2011 the share of associate

income after tax from BlueCrest was $67 million (2010: $73 million).

Ore Hill

Man's 50% equity investment in Ore Hill, a US based credit specialist fund manager, was acquired in 2008, and is treated as a joint venture. On 29 March 2011 we reached a definitive agreement with the principals of Ore Hill to acquire the remaining 50% equity interest in their business for approximately $18 million, including the issuance of $15 million of Man shares to the principals. An impairment charge of $22 million has been recorded against the existing carrying value to be in line with the valuation of the overall business. The transaction subsequently completed on 3 May 2011, following investor and regulatory consents.

Details of related party transactions with key management personnel.

Key management 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 Man, are as follows:

	2011(a) $000	2010 $000
Salaries and other short-term employee benefits (b) Post-employment benefits (c) Share-based payments (d) Other long term benefits (d)	9,360 393 8,504 937	6,670 1,885 (3,508) -
	19,194	5,047

Notes:

(a) After the acquisition of GLG, a new Executive Committee of the board ("Exco") was set up. Employees that are members of this Committee are included in key management compensation above from the Committee's formation on 22 November 2010.

(b) Salary, benefits, performance cash bonus and performance bonus with mandatory deferral into shares and social security.

(c) Money purchase pension and defined benefit increase in transfer value pension benefit.

(d) Other long term benefits relate to fund product deferrals. Refer to Note 19 of the Financial Review section for further explanation of share-based and fund product based deferred compensation arrangements. Further information around share-based payments is also included in Note 14 of the Additional Financial Information.

Responsibility Statement

Each of the directors confirms that, to the best of their knowledge:

• the consolidated 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 Sections 1-7 (pages 1 to 53) includes a fair review of the development and performance of the business and the position of Man, together with a description of the principal risks and uncertainties that it faces.

 

END

 

 

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