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Man Group plc (EMG)

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Monday 18 March, 2013

Man Group plc

Annual Financial Report

RNS Number : 2458A
Man Group plc
18 March 2013
 



Man Group plc

 

In compliance with Listing Rule 9.6.1 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 for the year ended 31 December 2012 (the "Annual Report")

2.       Notice of 2013 Annual General Meeting (the "AGM Notice")

3.       Form of Proxy for the Company's 2013 Annual General Meeting

 

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 28 February 2013. 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.man.com together with the AGM Notice.

 

Principal risks and mitigants

 

Risk

Mitigation

1. Investment underperformance risks

Fund underperformance on an absolute basis, relative to a benchmark or relative to peer groups would reduce funds under management and may result in lower subscriptions and higher redemptions. This may also result in dissatisfied clients, negative press and reputational damage.

 

Man's exposure to negative performance is further magnified due to leverage embedded in some guaranteed products. Man has experienced significant de-gearing of guaranteed products in recent years primarily due to AHL underperformance.

 

Lower funds under management results in lower management fee revenue and underperformance results in lower performance fees, if any.

 

The table on page 13, shows the breakdown of Man's revenue sources by product line. The largest contribution is from AHL (open-ended and within guaranteed products).

 

 

This is the key risk Man has to accept if it is to undertake its business. Man's investment businesses each have clearly defined investment processes designed to target and deliver on the investment mandate of each product. As described in the CFO report, macro conditions have severely impacted on Man's ability to perform in 2012.

 

Appropriate investment restrictions and limits are designed and implemented to place appropriate controls and guidance for each product consistent with the mandate they are working within.

 

Fund and manager performance is closely monitored, and we focus on hiring and retaining highly skilled professionals who are incentivised to outperform within the parameters of their mandate.

 

Man's diversified range of products and strategies across the alternatives marketplace mitigates the risk to the business from underperformance of any particular strategy. This has been further extended in 2012 through our acquisition of FRM, the launching of new fund products and the expansion of our Fixed Income capabilities at GLG.

 

2. Business transformation risks

Man is undergoing several transformational changes, which impact many aspects to the Group's business, and are subject to strategy and implementation risks.

 

(a) Cost reduction

Man in 2012 announced two rounds of significant cost reduction plans. The first has been successfully implemented, and the second is in progress. The risk is that Man is unable to action as planned and within the time frame stated.

 

(b) Outsourcing

Man is outsourcing a number of functions that were previously performed internally. The risks are that the outsourced service providers do not perform as required, resulting in knock-on implications for our business as a whole.

 

(c) Key staff retention

The risk that a key person to the business leaves or is unable to perform their role. Clearly, the current reorganisation puts key staff retention under pressure. However broader market conditions have meant that Man has been able to retain the talent that it needs.

 

 

Man has delivered the first round of cost reductions as stated - the businesses planned and implemented the actions necessary to deliver on the committed cost reductions.

 

Man's operations team, have extensive experience of running an outsourcing process, and have implemented a robust methodology (including extensive KPI monitoring) to ensure that service providers are able to deliver as required - this is in turn monitored by RAC and ARCom.

 

Although Man attracts and retains an array of talented individuals across the Group, business and investment processes have been designed with a view to minimise the impact of losing any particular key individuals. In addition, there is an established succession planning process at senior levels of the business.

3. Credit/counterparty risks

The risk that a counterparty with which Man has financial transactions fails to deliver investor or shareholder assets back to the Group.

 

Shareholders and Investors in Man funds and products are exposed to credit risk of prime brokers, clearing houses, futures clearers, depository banks and guarantee providers, if any.

 

If a default occurs and results in Man or its investors experiencing losses, this may adversely affect our reputation and could impact fund performance and subscriptions.

 

Man also provides loans to guaranteed products, and so is subject to counterparty risk to certain investor funds.

 

Man diversifies its deposits across a number of the strongest financial counterparties, each of which are approved by the Finance Committee and have maximum exposure limits set, in line with Man's risk appetite.

 

Man monitors credit spreads and ratings of our main trading counterparties and banks as forward indicators of their credit quality. During 2012 the average CDS spreads for banks have reduced significantly as banks have restructured businesses and markets have reverted from stressed conditions.

 

Man has mitigated this risk by increasingly investing its short-term liquidity into US treasury bills. Man is also in the process of doing the same for excess liquidity in investor portfolios.

 

Guaranteed products are closely monitored, and leverage is adjusted actively such that the risk of default related to balance sheet loans to funds is minimal.

 

4. Operational risks

Operational Risk is defined by Man as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.

 

Man Group's Operational Risk Policy provides an overview of the responsibilities that all staff have to identify, assess, monitor and manage Operational Risk within the Group. The policy aims to ensure everyone understands the part they must play in protecting the Group from unexpected loss or reputational harm due to an Operational Risk being inadequately controlled.

 

The three lines of defence model is key to managing this risk. It is dependent on having sufficient capable people to complement the policies. The RAC and the ARCom have reviewed the restructuring to ensure it does not have an adverse impact.

 

5. Discretionary trading risk

The risk that fund managers place inappropriate trades outside of mandate and regulatory boundaries. Man may need to compensate for any losses arising for such trades, as well as face the possibility of fines, lawsuits and reputational damage.

 

 

 

Front office systems provide automated checks and controls at portfolio and trade level. Each investment management business has dedicated risk management personnel who monitor portfolio profiles and provide independent challenge.

 

In addition all fund managers are required to undertake regular mandatory training to ensure they are aware of due processes and their responsibilities related to placing trades.

 

6. Reputational risks

The risk that an incident or negative publicity undermines our reputation as a leading alternative investment manager. Reputational damage could result in significant redemptions from our funds, and could lead to issues with external financing, credit ratings and relations with our outsourcing providers.

 

 

 

Our reputation is dependent on both our operational performance and fund performance. Integrity is fundamental to ensuring Man is able to attract investment in funds. Our strong governance and control structure outlined above helps mitigate operational concerns, and our attention to people and robust investment processes aim to ensure we comply with very high standards of investment management practice. The Board regularly reviews evidence of whether the right tone from the top is being maintained.

 

 

Related party transactions

Related parties comprise key management personnel and associates. 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 period was $169 million (31 December 2011: $177 million) and at 31 December 2012 total fee receivables and loan balances with fund entities deemed to be associates totalled $15 million (31 December 2011: $45 million). In addition, Man had entered into committed purchase agreements totalling $6 million (31 December 2011: $28 million) with fund entities deemed to be associates. All transactions with related parties were carried out on an arm's length basis.

 

Investments in associates

 

$m

12 months to 31 December

2012

9 months to 31 December

2011

 

At beginning of the period

Share of post-tax profit

Dividends received

Acquisition of controlling interest in Ore Hill

41

10

(13)

-

68

3

(3)

(27)

At period end

38

41

 

 

At 31 December 2012, the carrying value of investments in associates relates to a 25% interest in Nephila Capital Limited, an alternative investment manager specialising in the management in funds which underwrite natural catastrophe reinsurance and invest in insurance-linked securities and weather derivatives.

 

In the prior period, Man acquired the remaining 50% equity interest in Ore Hill for predominantly share-based consideration, with it becoming a subsidiary undertaking at that date.

 

Associates are entities in which Man holds an interest and over which it has significant influence but not control. Investments in associates 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). Gains and losses on transactions between the Group and its 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 associate has not been provided as it is considered excessive in length and is not considered meaningful. Details of associates will be annexed in the Company's annual return.

 

Details of related party transactions with key management personnel.

The Executive Committee consists of the executive directors and senior business leaders responsible for delivering the Company strategy with remuneration policy set accordingly to incentivise and encourage retention within the risk management framework. For 2012 Executive Committee members' incentive awards are significantly reduced to reflect the deteriorated performance outcome, and for those receiving bonuses, awards are subject to 100% deferral to focus on retaining key individuals. All share and fund awards are conditional and subject to forfeiture if an employee resigns or employment is terminated for misconduct.

 

The Executive Committee, together with the non-executive directors, are the Company's key management being those directors and employees having authority and responsibility for planning, directing and controlling the activities of Man.

 

Key management compensation is reported in Table R28 below. The current financial reporting period is 12 months. The previous nine month financial period, 9M 2011, compensation includes salary for the nine month financial period ended 31 December 2011 and bonus for the 12 month period ended 31 December 2011. This change in financial periods limits the value of inter-period comparisons.

 

Table R28

Key management compensation (audited)

12 months to 31 December

2012

$'000

9 months to 31 December

2011

$'000

Salaries and other short-term employee benefits (b)

Performance Cash and Mandatory Deferral (c)

Post-employment benefits (d)

Share-based payments (e)

Other long term benefits (e)

8,274

0

263

16,001

3,154

6,462

13,556

735

11,046

444

Total

27,692

32,243

 

Notes:

(a) Key management includes non executive directors and the Executive Committee including executive directors of the Board.

(b) Salary, benefits (including cash pension allowance) and social security.

(c) Cash bonus including social security.

(d) Money purchase pension and defined benefit increase in transfer value pension benefit. Refer to tables R25 and R26.

(e) Other long-term benefits relate to fund product deferrals. Refer to Note 20 to the financial statements for further explanation of share-based and fund product based deferred

compensation arrangements.

 

Other matters

Man Group is subject to various claims, assessments, regulatory enquiries and investigations in the normal course of its business, including an on-going informal enquiry from the Securities and Exchange Commission (SEC) in the US in relation to the historical valuations of two illiquid assets. The directors do not expect these enquiries to have a material adverse effect on the financial position of the Group.

 

Directors' responsibility statement

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

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

·      the Management report contained on pages 1 to 25 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; and

·      there is no relevant audit information of which the Group's auditors are unaware, and that they have taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that Man's auditors are aware of that information.

 

 

ENQUIRIES

 

Fiona Smart

Head of Investor Relations

+44 20 7144 2030

[email protected]

 

David Waller

Head of Communications

+44 20 7144 2121

[email protected]

 

Laura Humble

PR Manager

+44 20 7144 3266

[email protected]

 

RLM Finsbury

James Bradley

Ryan O'Keeffe

+44 20 7251 3801

 

This announcement is issued on behalf of both Man Group plc and Man Strategic Holdings plc (as appropriate).


This information is provided by RNS
The company news service from the London Stock Exchange
 
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