Shares in Man Group jumped 6% to 334.8p after UBS upgraded the hedge fund manager to 'buy', betting that a sharp rebound in its computer-driven strategies will force forecasts higher.
The Swiss bank lifted its rating from 'neutral' and raised its price target to 365p from 335p.
At the heart of the call is AHL, Man Group's suite of trend-following funds, which use algorithms to ride momentum across markets.
Black box roars back
After five flat-to-negative months, AHL's funds have climbed 7% since early August, with its Evolution strategy up 14%.
That leaves all four of its key strategies above their high watermarks, the level a fund must clear before it can charge lucrative performance fees.
UBS analyst Michael Werner said the recent gains had not been reflected in the share price, leaving the stock more than a standard deviation below its seven-year average valuation.
On the higher fund values, UBS raised its performance-fee earnings forecasts sharply, pushing its 2027 and 2028 estimates 28% to 29% above the market consensus.
Buybacks in the pipeline
Man Group has funnelled almost all its performance-fee earnings into share buybacks in recent years, and UBS expects that to continue at around 85% going forward.
That points to buybacks worth roughly 5% of the company's value each year.
The catch
The obvious risk is that AHL's fortunes reverse, since a 5% swing in fund values feeds through to a 7% to 15% move in earnings.
UBS conceded that returns in the space are nearly impossible to forecast.
Even so, it expects the next catalyst to come in early October, when rival analysts are likely to raise their numbers to reflect AHL's run as the third quarter closes.
