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Trader Talk is produced by a team of active traders, analysts and various derivatives professionals from multiple organisations. Trader Talk provides comment on equities, commodities, and other financial instruments based on both technical and fundamental analysis.
Hedge your bets at Man
A glance at the above chart of the FTSE 100 shows it has been a strong week for equities on the back of hopes that Eurozone policymakers are finally nearing some solutions to the on-going sovereign debt crisis.
Reports from last weekend’s IMF meeting suggest that the European Union’s rescue fund could be given considerably greater firepower and banks could receive substantial capital injections to help them deal with a possible Greek default later in the year.
Sceptics, however, argue that the plan does nothing to address the fundamental problems that the peripheral economies face and the new plans do not appear to allow for debt write-offs by countries other than Greece, which could just create further contagion.
On Thursday, Germany’s lower parliament approved expanded powers for the EU’s main bailout fund, an important step in a tortuous process that has rattled equity markets. The ‘Troika’, international accountants, will however meet with Germany’s upper house of parliament on Friday, when it will decide if Greece will be given its next bail-out tranche.
Global economic data has remained mixed, with some encouragement coming from the US as house prices increased modestly in July and the Conference Board’s Index of consumer confidence inched up to 45.4 in September from an upwardly revised 45.2 the previous month.
Meanwhile, in Europe the German IFO index, a survey of domestic business confidence, fell to a 15-month low of 107.5 in September from 108.7 in August, revealing the German economy is losing momentum. UK retail sales also weakened at their fastest pace for 16 months in September as squeezed consumers clamp down on spending.
Technical analysis highlights the trading range the index has been following since early August, with resistance at 5415 and support at 5060 and 4990. The index is currently mid-range with the RSI moving sideways, signalling a clear lack of direction as markets await macro-economic news.
In conclusion, equities have rallied amid hopes for imminent policy action in Europe, but it will soon become clear whether this is premature or not. Policymakers are under intense scrutiny, but they are clearly a long way from consensus, which could generate further delays. Investors should remain nimble, but continue to buy the dips and sell the strength until further developments materialise.
Man Group (LON:EMG) shocked the market this week, as the world’s largest listed hedge-fund group said investors have pulled billions of dollars from its funds since June.
Man announced that its assets under management fell by $6 billion to $65 billion, after clients redeemed a net $2.6 billion. Unfavourable currency moves accounted for a further $1.9 billion and negative fund performance wiped off another $1.5 billion.
After such a strong first quarter, the weakness in the second quarter is disappointing and took most analysts by surprise, particularly given a recent improvement in the market and a better performance from AHL, its main flagship fund.
Largely as a consequence of lower funds under management, lower performance fees and higher finance costs, the group now expects to make $145 million pre-tax profit for the six months ending 30th September, well below analysts’ expectations.
Last year’s acquisition of GLG, a rival hedge fund manager, appears to be the main source of Man’s troubles. Investment losses at GLG’s alternative and long-only funds took $3 billion off assets under management last quarter and their funds accounted for most of Man’s $2.6 billion net outflows. CEO Peter Clarke, however, argues that despite the poor recent performance at GLG, it has helped the group to diversify and will benefit long-term.
Man’s main AHL fund remains the silver lining and is responsible for an estimated two-thirds of company profits. The fund is up 0.2% year-to-date compared with a loss of 1.2% for the average hedge fund.
Despite many analysts’ expectations, I do not believe the net outflows are a surprise given both hedge funds and traditional asset managers across the world are experiencing heavy client withdrawals, as wary investors switch their money into cash. Aberdeen Asset Management for example announced earlier this week that it had lost 4.8% of assets or £8.1 billion from investor redemptions and fund losses in the two months to 31st August.
Sentiment is the lowest since the collapse of Lehman Brothers at the height of the previous financial crisis, but Clarke was keen to point out that Man is well positioned to withstand any sustained downturn and sentiment changes quickly, with any developments in Europe likely to have a dramatic, positive effect. Despite the latest outflows, Credit Suisse predicts assets under management will reach $67 billion by the year end and $78 billion in 2012, from $65 billion now.
Management has confirmed the interim dividend will be maintained at 9.5 cents and the board expect to propose a final dividend for the three month period ending in December of 7 cents, as they are moving to a calendar year reporting schedule. This implies the group still yields around 8.5% per annum, but is pro-rated for the nine months ending December 2011 to 6%.
Given the recent weakness the shares trade on a prospective earnings of 8x and with over 20% growth forecast, it puts them on an attractive PEG of 0.4.
The above chart of Man illustrates the recent fall with the shares losing over 25%, before finding support near the August lows.
I believe the recent weakness is overdone and a long with a tight stop-loss offers an attractive risk/reward bias. At the time of writing the share price is 176p and near term targets are seen at 186.8p, 197.8p and 209.5p with a stop-loss marginally below the recent low at 165.4p.
This report was written by Mark Allen – Head of Derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Man Group, but client accounts may. The material in this report has come from Simply Charts and Man Group’s corporate website.
