Indeed, there is a publicly traded hedge fund. It is not just a small shack, but it currently even has more assets under management (AuM) than Ray Dalio’s Bridgewater and several times more (!) than other famous names like Citadel or Tiger Asset Management. Is a PE of 10x and a dividend yield of 5% with opportunistic buybacks convincing enough to consider this stock?

Summary and key takeaways from today’s Weekly
– Man Group is the biggest publicly traded hedge fund with a strong performance over the last ten years.
– Besides a progressively rising dividend, the (former) management has aggressively repurchased its own stock.
– But there are three things I dislike – besides the fact that I do not like money managing firms.

I must admit that I didn’t know the stock before, despite Man Group plc (ISIN: JE00BJ1DLW90, Ticker: EMG) being one of the biggest hedge funds, measured by assets under management (AuM). It has been in business for about 240 years already and today, Man is the biggest publicly traded hedge fund even.

Yes, one can buy its stock on the London Stock Exchange.

The group evolved over time and also grew through acquisitions, but being this long in business is testament to a successful and enduring business. However, a long history is not always a guarantee for further success – just think of Lehman Brothers which had a history of more than 150 years before it collapsed in 2008.

Please see my weekly about why I don’t care about the “Lindy effect” by clicking here where I have discussed this topic.

Likely I haven’t heard of Man Group before, because in my research universe they haven’t made enough noise. No, seriously, I am personally not a fan or even highly averse of fund-like stock investments because this often goes hand in hand with complexity which I don’t like.

My members know that I prefer clear-cut and simple investment theses.

I simply don’t want to own stock in companies like Berkshire Hathaway (ISIN: US0846701086, Ticker: BRK.A) and the likes.

It is not that I do not have enough faith in them to generate great returns.

Due to being a stock analyst by profession and doing this highly passionately, my motivation is too high to give away the responsibility.

I just want to find and pick the gems myself.

Plus, the bigger such companies become, the less likely it is for them to be able to invest in small- to mid-sized companies I am often enough interested in (not always, but the majority of my stock ideas for my members have a market cap of less than 10 bn. USD).

Being a private retail investor, one does not have to worry about too much about how to put several hundred millions or even a few billions to work so that it moves the needle (see my article about why Buffett’s hands are tied here).

Interestingly, Man Group has a market cap of only 3 bn. GBP.

While this does not qualify it automatically to be of interest for me, the headline parameters do look fairly interesting. A growing business with a shareholder friendly distribution policy is paired with a PE ratio of only 10x.

I thought it would be a good idea to look a bit beyond my horizon.

So, let’s have a look a Man Group.

The average total return of my best stock ideas is +10.9%, beating the S&P500 and the iShares MSCI World ETF.

The average total return of my best stock ideas is ahead of the S&P500 and the iShares MSCI World ETF. With my risks-first approach (paired with high upside), I am able to find stocks with great returns.

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The good things

Man Group has currently about 167.5 bn. USD in assets under management per the end of the last year. This is quite a high figure not only on an isolated basis, but especially compared to the big fish of the hedge fund industry, as you can see below.

Personally, before having seen these numbers, solely through media coverage and headlines, I thought that Ray Dalio’s Bridgewater is – even by far – the biggest name. Regarding US hedge funds, that’s true.

But Man Group is playing clearly at the top of the first league.

Last year came a big jump in AuM for Man due to a mix of new money inflows, its investment performance as well as an acquisition.

Man Group is a technology-driven entity, focussing on quantitative processes. That’s roughly how they describe themselves.

What this means in simple terms is they trade based on rules (likely also using algorithms), not on personal judgements or even emotions. When looking into their material, one finds quite often the word “technology”.

Their investment profile can be split into two pieces, a long-only approach and a block of so-called “alternative investments”. Both are spread over different asset classes, hence not just stocks. In the latter, you’ll find total return strategies (aiming for gains in every market environment), hedging, but also things like private credit.

Regarding performance, Man discloses an absolute and a relative number.

Absolute is what you’d typically think of, i.e. the overall net return. Relative is against a benchmark group, presenting the out- or underperformance.

In 2023, their results were as follows:

Interestingly, with their long-only portfolio, Man generated a return of +16.4% which is a good result. However, the total return for the whole group was somewhat lower at only +6.8% because their alternatives dramatically underperformed (though beating their benchmark) with a minuscule +1.9%.

Due to alternatives being the bigger segment, the overall performance suffered.

As with sharply rising interest rates in 2022 and the first half of 2023 bonds came under pressure, I’d guess that this is what drove the performance down. But this is not of further interest for us.

Another thing key to understand is how Man generates their revenues.

Again, we have two blocks. One is a fixed provision based on the assets under management. This is a more stable income stream with comparatively little fluctuation as long as investors don’t pull out their money.

But the kick comes from variable performance fees which in great years dramatically drive the results up. And this is what happened in 2021 as well as 2022. Vice versa, 2023 was a more subdued year which on the first sight looks like a catastrophe, but it wasn’t.

It’s just the result of overly successful, but somewhat exuberant two years that only normalized. Such funds typically have so-called high-watermark rules, meaning new highs have to be made for the performance fee to get paid. Otherwise they could lose in a bear market and earn fees on the next run up, despite trailing the previous highs.

Above, you can see the darker block which is the core fee based on AuM. The fluctuation was way lower and 2023 turned out to be even the second best year.

On the other side, the light blue block shows that performance fees have been the worst over the last five years, resulting in a seemingly bad year.

To sum it up, the core worked well, the bonuses were low.

While it wasn’t a strong year, either, it was okay.

Looking at the results of the last ten years, we can see that revenues (and operating income even more so) tend to fluctuate heavily, deepening on how the markets did.

One could assume that over the last ten years nothing has happened. While seemingly true on the surface, this couldn’t be further from the truth.

The stock is currently even close to a ten-year high (though no all-time high).

Investors have done pretty well, also thanks to managements generous shareholder returns. The fluctuations in share price were rather great opportunities to enter the game at favorable conditions.

As Man Group is paying a progressively rising dividend, one could have bought the stock, collected the dividend and waited for the price to go up again.

There were times when the dividend yield was above 6% and even 7% – and it was hiked by 60% since 2014.

To complement shareholder distributions, management uses extraordinarily great years with strong results and plenty of cash flow to aggressively repurchase its own stock.

I could’ve included the stock into my last week’s overview about cannibals (see here).

Over the last ten years, share count has fallen by 32%, with a good chunk of the buybacks having taken place over the last two years – after the strong results of 2021 and 2022.

With that, we have a stock with a PE ratio of 10x which does not seem expensive.

Even if growth is subdued, aggressive buybacks can propel a stock higher meaningfully. But there are a few things I do not like about this company.

The not so good things

Basically, there are three things that killed this as a possible investment for me – besides the fact that I don’t like investment firms.

Number one is a change in management.

The prior CEO, Luke Ellis, was known to be a very generous leader, but he has stepped down last year. He was CEO of Man from 2016–2023. Man’s stock almost tripled under his tenure, not counting dividends. Clearly, a pleasant time for shareholders. Ellis was also one of the bigger shareholders, sitting in the same boat.

By the way, he retired already for the second time, as he had thrown in the towel prior to the Great Financial Crisis in his 40s retreating to his farm, but was called back and convinced to retire from retirement.

Now, a change in management does not have to be a bad thing.

But after a great CEO, the new one has to prove himself or herself in this case. The new CEO seems to be implementing a different strategy.

Honestly, this is not what I like to see.

While diversification is debatable, focusing more on private credit (and those other solutions, whatever that is) is not, at least not for me.

With this comes issue number two.

The balance sheet has an entirely new position on the passive side.

Man Group is a frequent acquirer, this is known. But with the takeover of last year, they seem to have accelerated the growth into the credit market.

And this has brought a new line of “CLO liabilities”. This stands for collateralized loan obligations. If you remember the disaster of 2008–2009 with highly rated garbage, then you will hopefully understand why my stomach turned around as I saw this.

As if this weren’t enough on an isolated basis, this position has the size of 62% of total equity and 23% of total assets.

Speaking about diversification, for me this is a dangerous concentration.

A second minor point regarding the balance sheet is the relatively high goodwill position.

I do not see it has inherently dangerous, but I do not like too much goodwill as this can be a sign of management having overpaid for their deals.

Number three: the valuation is not so low as it seems.

A PE ratio of 10x sounds low.

But for companies from the finance sector it is more of an average figure, sometimes even already high. And it’s a heavily fluctuating figure in the case of Man Group, so I am looking at more stable additional parameters.

While Man is not absurdly valued, the stock is historically not cheap, as the following charts prove.

While not on a ten-year high, the price to tangible book value (PTBV) is at its highest point of the last five years. Looking at the tangible version of the book value allows to strip the hot air in form of goodwill and other intangibles out of the equation.

There clearly have been better entry points in the past.

Next one, price to sales which looks pretty similar to the above (we can use it as debt is not a problem for Man).

I have already shown the dividend yield earlier, which would be another indicator that we are not dealing with a valuation at the historical lower end of the boundary.

So, if one is willing to take a ride, then please make sure to do so at a more favorable valuation as the stock can fluctuate heavily, including to the downside and also outside of extremely stressful years like 2020 or 2022.

Conclusion

Man Group is the biggest publicly traded hedge fund with a strong performance over the last ten years.

Besides a progressively rising dividend, the (former) management has aggressively repurchased its own stock.

But there are three things I dislike – besides the fact that I do not like money managing firms.

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