REG - Man Group plc - 2016 Full Year Results <Origin Href="QuoteRef">EMG.L</Origin> - Part 2
01/03/2017 07:07
- Part 2: For the preceding part double click ID:nRSA1408Ya
priority across all of our investment engines as we seek to generate superior risk adjusted
returns for our clients and develop innovative new strategies over time.
In 2016, AHL continued to diversify its offering, with net inflows of $3.7 billion across its range of strategies. AHL's
traditional momentum strategies, Diversified and Alpha, now only account for 41% of AHL's FUM, compared to 66% three years
ago. AHL launched its new Short Term Trading programme, which whilst it was capacity limited at $200 million, and only
offered to a handful of potential clients, it reached capacity within a week, all at full fees. AHL also launched its
Institutional Solutions offering, which provides bespoke portfolios for institutional clients with flexible combinations of
AHL's different strategies, with $1 billion of assets at the end of the year. AHL continued to focus on research through
the Oxford-Man Institute, which expanded its focus on machine and deep learning during the year. This will support the
ongoing evolution of quantitative strategies and the value we deliver to clients.
Numeric continued to leverage Man's resources and expertise, and launched a new Emerging Markets Core strategy, which
raised $300 million during the year. Numeric also has a number of innovative strategies in development and incubation.
At GLG, we believe we have a sustainable advantage in identifying teams and commercialising new strategies but we need to
improve the consistency of GLG's performance. In 2015, we announced the launch of our Emerging Markets Debt strategy. We
built out the team during the first half of 2016 and launched three new strategies during the second quarter of the year.
Since launch, the strategies have performed well, despite the post Trump EM market sell-off, and have generated inflows of
more than $1 billion, and we are seeing ongoing interest from clients.
Strong client relationships
We have made good progress in developing options for growth, both organically and by acquisition, across our different
investment engines during the year, to ensure that we maximise and strengthen our client relationships and meet client
needs. Gross sales were $21.7 billion during the year, with strong AHL, FRM and Numeric sales being partially offset by
lower sales for GLG. Our flows continue to be uneven in nature as our business becomes increasingly institutional, with
institutional sales in the year constituting 72% of total sales, and the top ten single inflows accounting for 22% of total
sales. Redemptions during the year were $19.8 billion, a 12% reduction compared to 2015.
We had strong net inflows of $4.3 billion for our quant alternative and long only strategies during the year, with quant
FUM increasing by 17%. Since becoming part of Man in 2014, Numeric has continued to grow its assets, with over 50% of the
total inflows since the acquisition coming from Man client relationships rather than pre-existing Numeric relationships,
which is a testament to the quality of the relationships we've built with clients.
chief executive OFFICER's review (Cont'd)
At FRM, we continued to see strong client interest in our managed accounts offering and were awarded three additional
mandates during the year of $1.5 billion, $700 million, and $300 million respectively. These mandates accompany the $2.7
billion mandate from a large US-based State Pension Plan awarded in 2015 and the $1 billion mandate awarded in 2014. Across
these mandates, $2.0 billion funded in 2015, $2.3 billion funded in 2016 and $1.9 billion is expected to fund from 2017
onwards. The growth of FRM's managed accounts offering more than offset the decline in FRM's traditional fund of fund
assets, which had net outflows of $1.0 billion during the year.
We also continued to see the trend of clients investing into products across our different investment engines, with 64% of
FUM at 31 December 2016 relating to clients invested into products across more than one of our investment engines.
In October, we announced the launch of Man Global Private Markets (Man GPM) with the acquisition of Aalto, a real asset
focused investment manager, with around $1.7 billion of funds under management. The acquisition of Aalto, and the launch of
Man GPM, creates an exciting opportunity for the Group as we believe there is strong client demand for strategies that
deliver solid, long-term returns.
In line with our overall strategy, we continue to look at other possible acquisitions, including in the private markets
space to complement Aalto, continuing to ensure we remain disciplined on price, structure and cultural fit.
We continue to focus on growing our business and expanding our client relationships in the US, which was a strong area of
growth during the year. In 2016, 29% of gross sales came from the Americas, up from 22% in 2015.
Efficient and effective operations
We remain focused on operating our business as efficiently as possible, particularly in times when the market environment
is challenging. We continually assess the level of our cost base across the firm in comparison to our revenue earning
capabilities and our options for growth, to ensure management fee profits remain as stable as possible. During 2016, we
began to implement a Board approved restructuring plan to make some significant changes to the structure of the business.
We have altered our senior management structure, shut down underperforming strategies in our investment management
business, and changed the structure of our sales function and the extent of our regional footprint. These restructuring
initiatives will cost approximately $21 million, of which $17 million was recognised in 2016 as a compensation related
restructuring charge. The total fixed cost savings are expected to be around $20 million per year, which will be realised
in 2017.
Capital management
Our balance sheet remains strong and liquid, and our surplus capital stands at around $325 million after the impact of the
Aalto acquisition, which completed in January 2017.
People
I would like to thank my senior management team and everyone at Man for their diligence and teamwork in what has been a
difficult year for the firm. Your commitment means we are now well positioned to grow the business as we work together to
deliver better solutions for our clients.
KEY PERFORMANCE INDICATORS (KPIs)
Our financial KPIs illustrate and measure the relationship between the investment experience of our clients, our financial
performance and the creation of shareholder value over time. Our KPIs determine the remuneration of the executive directors
and are used regularly to evaluate progress against our four key priorities: research and innovation, strong client
relationships, efficient and effective operations, and capital management. Our alternative performance measures are
discussed on page 55.
The results of our KPIs this year continue to reflect the difficult market environment, with strong outperformance for
Numeric, good relative performance for AHL, but weaker relative performance for GLG alternatives and FRM. Net flows were
positive for the year, with net inflows for quant alternative, fund of fund alternative and quant long only, partially
offset by net outflows in discretionary alternative and long only strategies. Management fee revenue and profitability were
down for the year as a result of lower FUM for GLG and the continued roll off of the guaranteed product FUM.
The investment performance KPI measures the net investment performance for our four managers (AHL, Numeric, GLG and FRM).
For AHL, GLG and FRM, investment performance is represented by key strategies against relevant benchmarks1. For Numeric,
investment performance is monitored by the net asset weighted outperformance or underperformance (alpha)2 based on a
predetermined benchmark by strategy. The target for the investment performance KPI is to exceed the relevant benchmarks.
The key strategies and the relevant benchmarks/reference indices are AHL Diversified versus three key peer asset managers
for AHL (the target being to beat two of the three peers), the GLG Alternative Strategies Dollar-Weighted Composite versus
HFRX for GLG and FRM Diversified II versus HFRI Fund of Funds Conservative Index for FRM. For Numeric, net asset weighted
outperformance is based on a benchmark against competitors by Numeric strategy. The performance of the key funds compared
to the benchmarks gives an indication of the competitiveness of our investment performance against similar alternative
investment styles offered by other investment managers. This measures our ability to deliver long-term performance to
investors. We achieved two out of the four performance targets with Numeric's positive net alpha in 2016, and the
performance of AHL's key strategy exceeding two out of three relevant peer benchmarks. GLG and FRM did not meet their
targets as their performance metrics were below their relevant benchmarks.
The second KPI measures adjusted management fee EBITDA as a percentage of net revenues (gross management fee revenue and
income from associates less cash distribution costs). Our adjusted management fee EBITDA margin is a measure of our
underlying profitability. The adjusted management fee EBITDA margin of 26.1% was within the target range for the year ended
31 December 2016, compared to 27.2% for the year ended 31 December 2015. The margin declined in 2016 primarily as a result
of the decline in management fee revenue, driven by the continued roll off of higher margin guaranteed product FUM, and
lower management fee revenue for discretionary alternatives and long only strategies due to a decline in FUM during the
year. For further information on EBITDA, see page 22.
The third KPI measures net FUM flows for the period as a percentage of opening FUM, with net flows defined as gross sales
less gross redemptions. Net flows are the measure of our ability to attract and retain investor capital. FUM drives our
financial performance in terms of our ability to earn management fees. Net flows were within the target range in 2016 with
a net inflow of 2.4%, represented by net inflows into quant alternative, fund of fund alternative and quant long only
strategies, partially offset by net outflows from discretionary alternative and long only strategies.
The fourth KPI measures our adjusted management fee EPS growth, where adjusted management fee EPS is calculated using
post-tax profits excluding net performance fees and adjusting items, divided by the weighted average diluted number of
shares. The target is growth of 0%-20% plus RPI each year. Adjusted management fee EPS growth measures the overall
effectiveness of our business model, and drives both our dividend policy and the value generated for shareholders. The
adjusted management fee EPS growth of -11.8% was not within the target range for 2016 (target of 0%-20% plus RPI of 2.5%).
The adjusted management fee EPS declined due to the impact of lower management fee revenues, as a result of lower revenue
from discretionary alternative and long only strategies and the continued roll off of higher margin guaranteed products,
partially offset by lower costs. For further information on EPS, see Note 9 to the financial statements.
1 Where "benchmarks" is used, this may refer to an official benchmark set for a fund or in other
circumstances, a reference index which is set for performance illustration and comparison purposes only.
2 Numeric's net asset weighted alpha for the year to 31 December 2016 is calculated using the asset weighted
average of the performance relative to the benchmark for all strategy composites available net of the
highest management fees and, as applicable, performance fees that can be charged.
CHIEF FINANCIAL OFFICER'S REVIEW
2016 was a turbulent year for asset managers. The environment impacted our financial results, with a statutory loss driven
by the impairment of GLG and FRM's goodwill, and lower adjusted profit before tax driven by lower performance fee
earnings.
Overview
Despite the difficult market conditions, we are pleased to report organic growth in funds under management (FUM), up 3% to
$80.9 billion. The increase was primarily driven by positive investment performance of $3.2 billion, mainly from our long
only strategies. In addition, we achieved net inflows of $1.9 billion, mainly into our quant alternative and quant long
only strategies, partially offset by material net outflows for our discretionary alternative and long only strategies.
These positive movements were partially offset by negative FX and other movements, primarily as a result of the US Dollar
strengthening during the year.
Net management fee revenue was $691 million for the year, 9% lower than the previous year. This decline was mainly caused
by the drop in management fee revenue for GLG due to the decrease in FUM during the year, as well as the decline in our
higher margin guaranteed product FUM, with guaranteed product net management fees declining 59% from $76 million to $31
million in the year. As the guaranteed product FUM is $400 million at 31 December 2016, we expect 2017 to be the last year
where the reduction in our guaranteed product business has a significant year on year impact on our overall net management
fees.
Performance fee revenues were $81 million, which decreased from $302 million in 2015, with declines across all of our
investment managers, in particular for AHL, as the market environment proved difficult for a range of investment
strategies.
We remain focused on operating our business as efficiently as possible, whilst also investing in research to build
innovative strategies for clients. As discussed in the Chief Executive's Review, in 2016 we began to implement a Board
approved restructuring plan to make some significant changes to the structure of the business. These restructuring
initiatives will cost approximately $21 million, of which $17 million was recognised in 2016 as a compensation related
restructuring charge in adjusting items, and will result in around $20 million of annual fixed cost savings in 2017.
Our statutory loss before tax before tax was $272 million (2015: statutory profit of $184 million). The impairment of the
goodwill and intangibles relating to the GLG and FRM businesses, of $281 million and $98 million respectively, was the main
cause of the statutory loss. The impairment reflects the impact the challenging market environment has had on the valuation
of discretionary investment management and fund of fund businesses. Our adjusted profit before tax was $205 million, down
from $400 million in the prior year, and adjusted diluted earnings per share were 10.4 cents (2015: 21.1 cents). The
majority of this decline was caused by the drop in our adjusted performance fee profit before tax to $27 million, down from
$206 million in 2015. This decline reflects the difficult performance environment in 2016 across our strategies,
particularly within quant alternatives. Adjusted management fee profit before tax was $178 million, down from $194 million
in 2015. This reflects the $68 million decline in net management fees, partially mitigated by our actions on costs.
Our balance sheet remains strong and liquid with net tangible assets of $633 million or 38 cents per share at 31 December
2016. Our regulatory surplus capital is $392 million at 31 December 2016, and we have a net cash position of $240 million.
The business continues to be strongly cash generative, and our focus remains on generating strong cash flows to either
return to shareholders or invest to generate improved future cash flows. In line with this approach, in 2016, we announced
a $100 million share repurchase, which we expect to complete in the coming months, and the acquisition of Aalto, which will
utilise around $70 million of capital in 2017.
Impairment of GLG and FRM
In 2016, we impaired the GLG and FRM goodwill and intangibles by $281 million and $98 million respectively. During the
year, GLG had difficult business performance, with lower FUM, management fees and performance fees. While these trends are
partially mitigated by lower future costs due to action we have taken, there was still a material reduction in the carrying
value of the GLG business which led to the impairment. For FRM, the impairment reflects reduced prospects for the
traditional fund of fund business in light of 2016 performance, rather than declines experienced in the year. In
particular, we expect continued margin declines as the business mix moves towards investment solutions. It is worth noting
that while we refer to our fund of fund business as FRM today, most of the goodwill relates to Man's historical acquisition
of Glenwood in 2000.
chief financial officer's review (Cont'd)
Funds under management (FUM)
Alternative Long only
$bn Quant (AHL/Numeric) Discretionary(GLG) Fund of funds(FRM) Quant (AHL/Numeric) Discretionary(GLG) Total excludingGuaranteed Guaranteed Total
FUM at 31 December 2015 16.4 16.3 11.9 18.6 14.2 77.4 1.3 78.7
Sales 6.0 2.2 3.5 4.3 5.7 21.7 - 21.7
Redemptions (2.3) (4.1) (2.7) (3.7) (6.8) (19.6) (0.2) (19.8)
Net inflows/(outflows) 3.7 (1.9) 0.8 0.6 (1.1) 2.1 (0.2) 1.9
Investment movement (0.3) 0.1 0.1 2.2 1.1 3.2 - 3.2
Foreign currency movement (0.2) (0.2) (0.2) (0.1) (1.4) (2.1) - (2.1)
Other movements - (0.4) 0.2 0.1 - (0.1) (0.7) (0.8)
FUM at 31 December 2016 19.6 13.9 12.8 21.4 12.8 80.5 0.4 80.9
Quant alternative (AHL/Numeric)
Quant alternative FUM increased by 20% during the year, largely as a result of strong net inflows across AHL's range of
strategies. Sales were $6.0 billion, which included $1.0 billion into Dimension, $900 million into Alpha, $900 million into
Diversified, $800 million into Institutional Solutions and $700 million into Pure Momentum. Redemptions were $2.3 billion,
which included $700 million from Diversified. The negative investment movement was a result of negative performance for
Diversified, Alpha, and Dimension, partially offset by positive performance for Evolution and Numeric's alternative
strategies. Negative foreign exchange movements related to the US Dollar strengthening against the Sterling, Euro and
Australian Dollar. At 31 December 2016, around 68% of quant alternative FUM was denominated in US Dollars, 17% in
Australian Dollars, 6% in Euro, 5% in Japanese Yen and 4% in Sterling.
Discretionary alternative (GLG)
Discretionary alternative FUM decreased by 15% during the year to $13.9 billion. Net outflows of $1.9 billion were mainly
from Equity Long Short and Convertibles strategies. Investment movement was marginally positive for the year. Negative
foreign exchange movements related primarily to the strengthening of the US Dollar against the Euro and Sterling. At 31
December 2016, around 60% of discretionary alternative FUM was denominated in US Dollars, 37% in Euro, 2% in Japanese Yen
and 1% in Sterling. The negative other movements relate to CLO maturities during the year.
Fund of funds (FRM)
Fund of funds FUM increased by $900 million, primarily as a result of net inflows during the year. Sales of $3.5 billion
included $1.3 billion of inflows from infrastructure mandates awarded in previous years and $1.0 billion from
infrastructure mandates awarded in 2016, and $500 million into segregated portfolios. Redemptions of $2.7 billion included
$1.5 billion from traditional fund of fund strategies. The investment movement was broadly flat for the year. The negative
foreign exchange movements were primarily due to the strengthening of the US Dollar against the Sterling, Australian Dollar
and Euro. At 31 December 2016, 57% of alternative fund of fund FUM was denominated in US Dollars, 24% in Yen, 8% in
Australian Dollars, 6% in Sterling and 5% in Euro.
Quant long only (AHL/Numeric)
Quant long only FUM increased by $2.8 billion during the year, as a result of net inflows and positive investment
performance for Numeric's strategies, partially offset by net outflows for AHL's quant long only strategies. Net inflows
for Numeric's strategies were $1.5 billion, which mainly related to their Emerging Market strategies, which are now close
to capacity, and their Global strategies. AHL's remaining long only assets were fully redeemed during the year, with
outflows of $900 million. Positive absolute investment performance in quant long only products increased FUM by $2.2
billion during the year, and Numeric's net asset weighted outperformance against applicable benchmarks was 1.4%1 for the
year. The majority of quant long only FUM is denominated in US Dollars.
1 Numeric's net asset weighted alpha for the year to 31 December 2016 is calculated using the asset weighted
average of the performance relative to the benchmark for all strategy composites available net of the highest management
fees and, as applicable, performance fees that can be charged.
chief financial officer's review (Cont'd)
Discretionary long only (GLG)
Discretionary long only FUM decreased by 10%, driven by net outflows and negative foreign exchange movements. The net
outflows included $1.6 billion of net outflows from Japan CoreAlpha, despite good performance, partially offset by net
inflows of $1.1 billion into the new Emerging Market Debt strategies. The positive investment movement was spread broadly
across the range of discretionary long only strategies, with Japan CoreAlpha the strongest performer, contributing around
half of the positive investment movement. Negative foreign exchange movements related to the strengthening of the US Dollar
against Sterling and Euro. At 31 December 2016, 52% of discretionary long only FUM was denominated in Sterling, 20% was in
Yen, 18% was in US Dollars and 10% was in Euro.
Guaranteed products
Guaranteed product FUM reduced by $900 million during the year. There were no sales and redemptions totalled $200 million.
Investment performance for guaranteed products was broadly flat during the year. Other negative movements relate to
maturities of $400 million and de-gearing of $300 million during the year.
Summary income statement
Investment performance and fund flows drive the economics of our business. Management fees are typically charged for
providing investment management services at a percentage of each fund's gross investment exposure or net asset value.
Performance fees are typically charged as a percentage of investment performance above a benchmark return or previous
higher valuation 'high water mark'.
Man is fundamentally a people business and the majority of our costs comprise payments to individuals, whether they are our
investment managers who manage investor assets, internal sales staff who distribute our products, or the teams that manage
our operations and infrastructure.
Year ended Year ended
31 December 31 December
$m 2016 2015
Gross management and other fees1 750 833
Share of post-tax profit of associates 2 3
Distribution costs (61) (77)
Net management fee revenue 691 759
Performance fees 81 302
Gains on investments2 31 24
Net revenue 803 1,085
Asset servicing (33) (32)
Fixed compensation (182) (177)
Variable compensation (206) (285)
Other costs1 (166) (177)
Total costs (587) (671)
Net finance expense (11) (14)
Adjusted profit before tax 205 400
Adjusting items (477) (216)
Statutory (loss)/profit before tax (272) 184
Adjusted net management fee profit before tax 178 194
Adjusted net performance fee profit before tax 27 206
Diluted EPS (statutory) (15.8) cents 10.0 cents
Adjusted net management fee EPS 9.0 cents 10.2 cents
Adjusted diluted EPS 10.4 cents 21.1 cents
1 Management and other fees also includes $4 million (2015: nil) of management fee revenue, and other costs includes a
deduction of $2 million of costs (2015: nil) relating to line-by-line consolidated fund entities for the third-party share
(per Group financial statements Note 14.2).
2 Gains on investments includes income or gains on investments and other financial instruments of $52 million (2015:
$15 million), less $15 million of third-party share of gains relating to line-by-line consolidated fund entities (2015:
plus $9 million of third-party share of losses), less the reclassification of management fee revenue and other costs as
above (2015: nil).
chief financial officer's review (Cont'd)
Management fees and margins
Management fees were $750 million, 10% lower than the previous year. The decrease mainly relates to the decline in net
management fee revenue from discretionary alternative and long only strategies due to a decrease in FUM during the year,
and the continued roll off of the guaranteed product FUM, partially offset by an increase in management fee revenue from
quant strategies. There is $400 million of guaranteed product FUM remaining at 31 December 2016, therefore, there will be
less of an impact of declining revenue from these assets in 2017 and beyond.
The Group's total net management fee margin (defined as gross management fees less external distribution costs) decreased
by 9 basis points during the year to 87 basis points, compared to 96 basis points in the previous year. The decline in the
overall net margin is mainly due to the continued roll off of the higher margin guaranteed product assets, the mix shift
within quant and fund of fund alternatives to lower margin institutional assets, and the growth of quant long only FUM,
which is at a lower margin. Excluding guaranteed products, the overall net margin decreased by 5 basis points to 83 basis
points.
During the year, the quant alternatives net management fee margin reduced by 14 basis points as a result of the continued
mix shift towards institutional assets and retail business at a lower margin, and a decline in the higher margin retail
back book of assets. During the year, quant alternative sales were at an average margin of 135 basis points and redemptions
were at an average margin of 180 basis points. Going forward, it is expected that the quant alternatives margin will
gradually decline further as the shift towards institutional assets and lower margin retail business continues.
Net management fee revenue
Year ended31 December 2016 Year ended31 December 2015
$m Net margin $m Net margin
Quant alternatives 260 1.40% 234 1.54%
Discretionary alternatives 138 0.93% 169 0.98%
Fund of fund alternatives 83 0.68% 81 0.80%
Quant long only 69 0.35% 59 0.34%
Discretionary long only 95 0.78% 121 0.79%
Guaranteed 31 4.28% 76 4.64%
Other income1 13 16
Net management fee revenues before share of after tax profit of associates 689 0.87% 756 0.96%
Share of post-tax profit of associates 2 3
Net management fee revenues 691 759
1 Other income primarily relates to distribution income from externally managed products.
Net management fee margins in the discretionary alternative category reduced by 5 basis points during the year, primarily
as a result of redemptions from higher margin strategies.
The net margin for the fund of funds category decreased by 12 basis points compared to 2015, as a result of the continued
mix shift towards infrastructure managed account mandates, with net inflows of $1.8 billion during the year, where margins
are materially lower. The fund of fund alternatives margin is expected to decline further as the shift towards lower margin
managed account mandates continues.
The quant and discretionary long only net management fee margins were broadly stable during the year.
The guaranteed product net management fee margin decreased by 36 basis points compared to the year ended 31 December 2015
due to maturities from higher margin products during the year.
chief financial officer's review (Cont'd)
Performance fees (including investment income/gains)
Gross performance fees for the year were $81 million compared to $302 million in 2015, which included $50 million (2015:
$218 million) from AHL, $9 million (2015: $37 million) from GLG, $19 million (2015: $40 million) from Numeric
and $3 million (2015: $7 million) from FRM. At 31 December 2016, around 34% of AHL open ended products ($5.7 billion) were
above performance fee high water mark and 31% ($5.2 billion) was within 5% of high water mark. Of the $7.8 billion
performance fee eligible Numeric products, 81% were outperforming the relevant benchmark at 31 December 2016. Around 33% of
eligible GLG assets ($3.2 billion) were above high water mark and a further 47% ($4.5 billion) within 5% of earning
performance fees. FRM performance fee eligible products were on average approximately 8% below high water mark.
The Group benefits from a portfolio of performance fee streams across a variety of strategies that are charged on a regular
basis at different points in the year. 94% of AHL FUM is performance fee eligible, of which 79% have performance fees that
crystallise annually, 16% daily or weekly, and 5% monthly. The majority of GLG's performance fees crystallise semi-annually
in June or December. Around 50% of Numeric performance fee eligible FUM crystallises annually in November, with the
remainder crystallising at various points during the year.
Investment gains of $31 million (2015: $24 million) primarily relate to gains on seeding investments.
Distribution costs
Distribution costs were $61 million in 2016, primarily relating to investor servicing fees paid to intermediaries for
ongoing investor servicing. Servicing fees have decreased by 20% largely due to the continued mix shift towards
institutional assets, particularly in the alternatives quant category, and the roll off of guaranteed product FUM.
Asset servicing
Asset servicing costs include custodial, valuation, fund accounting and registrar functions, and vary depending on
transaction volumes, the number of funds, and fund NAVs. Asset servicing costs were $33 million (2015: $32 million),
equating to around 5.5 basis points of average FUM, excluding Numeric. In 2017, asset servicing costs will increase to
around 6 basis points on FUM, excluding Numeric, as a result of further outsourcing in relation to our Asia Pacific
business.
Compensation costs
Compensation costs comprise fixed base salaries, benefits, variable bonus compensation (cash and amortisation of deferred
compensation arrangements) and associated social security costs.
Total compensation costs, excluding adjusting items, were $388 million for the year, down by 16% compared to $462 million
in 2015. Overall, compensation costs decreased primarily as a result of lower management and performance fee revenues.
Variable compensation fell by 28%, slightly more than the reduction in net revenue. The compensation ratio in 2016
increased to 48%, from 43% in 2015, as a result of the lower level of performance fee revenue. The Group's compensation
ratio is generally between 40% to 50% of net revenues, depending on the mix and level of revenue. We expect to be at the
higher end of the range in years when absolute performance fees are low and the proportion from Numeric and GLG is higher,
and conversely we expect to be at the low end of the range when absolute fees are high and the proportion from AHL and FRM
is higher.
Other costs
Other costs, excluding adjusting items, were $166 million for the year compared to $177 million for the year to 31 December
2015. These comprise cash costs of $152 million (2015: $161 million) and depreciation and amortisation of $14 million
(2015: $16 million). The $9 million reduction in cash costs reflects the continued efforts to remain disciplined on costs,
which has resulted in a lower underlying other costs base compared to 2015. Depreciation and amortisation has decreased by
13% this year due to the 2015 charge including a one-off expense of $2 million. Depreciation and amortisation is expected
to increase in the next few years due to investment in operating platforms and business infrastructure and planned capital
expenditure of between $40 million and $50 million over the next two to three years.
chief financial officer's review (Cont'd)
Restructuring
During 2016, we began to implement a Board approved restructuring plan to make some significant changes to the structure of
the business. We have altered our senior management structure, shut down underperforming strategies in our investment
management businesses, and changed the structure of our sales function and the extent of our regional footprint. A
compensation related restructuring charge of $17 million was recognised as an adjusting item. These restructuring
initiatives will continue into 2017 and will be completed by the end of the year. The total fixed cost savings are expected
to be around $20 million per year, which will be realised in 2017.
Net finance expense
Net finance expense, excluding adjusting items, was $11 million for the year (2015: $14 million). The decrease is due to
lower ongoing costs for the Group's revolving credit facility, which was renegotiated in June 2015. The revolving credit
facility was renegotiated further during the year, reducing from $1,000 million to $500 million, which will lower financing
costs going forward.
Adjusted profit before taxes
Adjusted profit before tax is $205 million compared to $400 million for the previous year. The adjusting items in the year
of $477 million (pre-tax) are summarised in the table below and detailed in Note 2 to the Group financial statements. The
directors consider that the Group's profit is most meaningful when considered on a basis which excludes acquisition and
disposal related items (including non-cash items such as amortisation of purchased intangible assets and deferred tax
movements relating to the recognition of tax losses in the US), impairment of assets, restructuring costs, and certain
non-recurring gains or losses, which therefore reflects the recurring revenues and costs that drive the Group's cash flow
and inform the base on which the Group's variable compensation is assessed.
Adjusting items $m Year ended31 December2016
Acquisition related professional fees and other integration costs (2)
Impairment of GLG and FRM goodwill and intangibles (379)
Revaluation of contingent consideration creditors 40
Unwind of contingent consideration discount (19)
Compensation restructuring costs (17)
Other restructuring costs (4)
Amortisation of acquired intangible assets (94)
Other adjusting items (net) (2)
Total adjusting items (excluding tax) (477)
Recognition of deferred tax asset (refer to following page) 6
chief financial officer's review (Cont'd)
Adjusted net management fee and net performance fee profit before tax
Adjusted net management fee profit before tax was $178 million compared to $194 million in 2015 due to the decrease in
gross management fees, partially offset by a decrease in costs. Adjusted net performance fee profit before tax of $27
million (2015: $206 million) for the year reflects the lower performance fees across the business, particularly for AHL.
$m Year ended31 December2016 Year ended31 December2015
Gross management and other fees1 750 833
Share of post-tax profit of associates 2 3
Less:
Distribution costs (61) (77)
Asset services (33) (32)
Compensation (312) (351)
Other costs1 (166) (177)
Net finance expense (2) (5)
Adjusted net management fee profit before tax 178 194
Performance fees 81 302
Gains on investments and other financial instruments2 31 24
Less:
Compensation (76) (111)
Finance expense (9) (9)
Adjusted net performance fee profit before tax 27 206
1 Gross management and other fees also includes $4 million (2015: nil) of management fee revenue, and other costs
includes a deduction of $2 million of costs (2015: nil) relating to line-by-line consolidated fund entities for the
third-party share (per Group financial statements Note 14.2).
2 Gains on investments includes income or gains on investments and other financial instruments of $52 million (2015:
$15 million), less $15 million of third-party share of gains relating to line-by-line consolidated fund entities (2015:
plus $9 million of third-party share of losses), less the reclassification of management fee revenue and other costs as
above (2015: nil).
Taxation
The tax credit on the statutory loss for the year was $6 million (2015: tax charge of $13 million). This equates to an
effective tax rate of 2% (2015: 7%). The GLG and FRM goodwill and intangibles impairment charge is largely not deductible
for tax purposes, and as the Group has made a statutory loss, this is the primary cause of the lower tax rate.
Excluding these impairment charges and other adjusting items, the effective tax rate on adjusted profit was 14% (2015:
10%). This rate is higher than the underlying rate on adjusted profit of 13% (2015: 13%), as a result of certain expenses
on which no tax relief is received.
The underlying rate represents the statutory tax rates in each jurisdiction in which we operate applied to our geographical
mix of profits. The majority of Man's profit is earned in the UK, with significant profits also arising in the US, where
our tax rate is effectively nil as a result of available tax losses, and in Switzerland, which has a lower rate than the
UK. The principal factors that we expect to influence our future underlying tax rate are: the mix of profits by tax
jurisdiction; and changes to applicable statutory tax rates.
Should the earnings profile of the Group in the US increase significantly this could result in the earlier recognition of
the US deferred tax asset in full and as a result the tax rate for the Group would change in line with the prevailing
corporation tax rate in the US and the proportion of the Group's profits at that time. The underlying tax rate in 2017 is
currently expected to remain consistent with 2016, dependent on the factors outlined above.
In the US, we have $210 million of accumulated federal tax losses which we can offset against future profits from US
entities and will therefore reduce taxable profits. In addition, we have $485 million of tax deductible goodwill and
intangibles, largely relating to the Numeric (2014) and Ore Hill (2008) acquisitions, which are amortised for tax purposes
in the US over 15 years, reducing US taxable profit in future periods. We therefore expect not to pay federal tax in the US
for a number of years. Based on forecast US taxable profits and consistent with the methodology applied in prior years, the
Group has a deferred tax asset on the balance sheet of $25 million, which represents probable tax savings over a three year
forecast period due to the utilisation of these losses and future amortisation of intangibles.
chief financial officer's review (Cont'd)
This has resulted in a $6 million credit to the tax expense in the year (2015: $11 million credit), which is included as an
adjusting item. Further details on this deferred tax asset are given in Note 8 to the Group financial statements.
Cash earnings (EBITDA)
The Group continues to generate strong cash earnings. As the Group has a number of non-cash items in the income statement
it is important to focus on cash earnings to measure the true earnings generation of our business. The table below gives a
reconciliation of adjusted profit before tax to adjusted EBITDA. The main differences are net finance expense, depreciation
and amortisation, and deferred compensation charges relating to deferred awards. Our adjusted EBITDA/net revenue margin was
27.8% (2015: 38.8%), which can be divided between margin on management fees of 26.1% (2015: 27.2%) and performance fees of
39.8% (2015: 66.0%). The EBITDA management fee margin has decreased due to the continued decline in higher margin
guaranteed product FUM, and a shift to lower margin institutional and long only assets. The EBITDA performance fee margin
has decreased as a result of a higher percentage of performance fee variable compensation in 2016, as a result of the low
level of performance fee revenue for the year.
Reconciliation of adjusted PBT to adjusted EBITDA
$m Year ended31 December2016 Year ended31 December2015
Adjusted PBT (refer to Note 2 in the financial statements) 205 400
Add back:
Net finance expense 11 14
Depreciation 11 13
Amortisation of capitalised computer software and placement fees 5 6
Current year amortisation of deferred compensation 55 53
Less: Deferred compensation awards relating to the current year (63) (64)
Adjusted EBITDA 224 422
The full cash flow statement is given on page 28.
Liquidity
Operating cash flows, excluding working capital movements, were $245 million during the year and cash balances were $389
million at year end, excluding cash relating to consolidated fund entities.
$m Year ended31 December2016
Cash at 31 December 2015 607
Operating cash flows before working capital movements 245
Working capital movements (including seeding) (161)
Payment of dividends (158)
Share repurchase (including costs) (35)
Payment of acquisition related contingent consideration (25)
Other movements (47)
Cash and cash equivalents 426
Less cash held by consolidated fund entities (37)
Cash at 31 December 2016 389
Working capital movements principally relate to a decrease in the variable compensation payable, as we reduced compensation
in 2016 to reflect lower performance revenue, and an increase in seeding investments, partially offset by a decrease in
performance fee receivables at the year-end.
In October, we renegotiated our revolving credit facility, reducing its size from $1,000 million to $500 million, and
extended the maturity to 2021 (with one remaining one-year extension option). The facility remains available and undrawn.
The management of liquidity and capital are explained in Note 13 to the Group financial statements.
chief financial officer's review (Cont'd)
Balance sheet
The Group's balance sheet is strong and liquid. Cash has decreased during the year largely as a result of dividends on
ordinary shares ($158 million), net increase in seeding investments ($116 million), the share repurchase and associated
costs ($35 million), and contingent consideration payments ($25 million), partially offset by other cash inflows from
operating activities. Goodwill and other intangibles have decreased in 2016 primarily due to amortisation and impairment of
$473 million.
31 December 31 December
Summarised balance sheet $m 2016 2015
Cash and cash equivalents 426 607
Fee and other receivables 257 303
Total liquid assets 683 910
Payables (704) (750)
Net liquid assets (21) 160
Investments in fund products and other investments 685 581
Pension asset 27 48
Investments in associates 31 30
Leasehold improvements and equipment 44 44
Total tangible assets 766 863
Borrowings (149) (149)
Net deferred tax asset/(liability) 16 (10)
Net tangible assets 633 704
Goodwill and other intangibles 1,041 1,511
Shareholders' equity 1,674 2,215
Seeding investments
Man uses capital to invest in new product launches to assist in the growth of the business. At 31 December 2016, the
Group's seeding investments were $642 million (refer to Note 14 in the financial statements), which have increased from
$526 million at 31 December 2015. The increase is mainly due to new seeding investments during the year, primarily in
relation to the new AHL Oxon strategy and a number of new GLG strategies.
Regulatory capital
Man is compliant with the FCA's capital standards and has continued to maintain significant surplus regulatory capital
throughout the year. At 31 December 2016, surplus regulatory capital over the regulatory capital requirements was $392
million.
The decrease in the Group financial resources of $68 million in the year primarily relates to the $100 million share
repurchase programme, which commenced in October.
The decrease in the Group financial resources requirement of $7 million primarily relates to a lower capital requirement on
performance fee receivable balances, partially offset by a higher requirement for the increase in seeding investments.
Group's regulatory capital position
31 December 31 December
$m 2016 2015
Permitted share capital and reserves 1,530 2,087
Less deductions (primarily goodwill and other intangibles) (995) (1,485)
Available Tier 1 Group capital 535 602
Lower Tier 2 capital - subordinated debt 149 149
Other Tier 2 capital 2 3
Group financial resources 686 754
Less financial resources requirement (294) (301)
Surplus capital 392 453
As at 31 December 2016 there has been no change to the Internal Capital Guidance scalar that is applied as part of the
calculation of the financial resources requirement.
chief financial officer's review (Cont'd)
Dividends and share repurchases
Man's dividend policy is to pay out at least 100% of adjusted net management fee earnings per share (EPS) in each financial
year by way of ordinary dividend. In addition, Man expects to generate significant surplus capital over time, primarily
from net performance fee earnings. Available capital surpluses will be distributed to shareholders over time, by way of
higher dividend payments and/or share repurchases, while maintaining a prudent balance sheet, after taking into account
required capital (including liabilities for future earn-out payments) and potential strategic opportunities.
Adjusted net management fee EPS is considered the most appropriate basis on which to routinely pay ordinary dividends as
this represents the most stable earnings base of the business, and enables the Board to utilise performance fee earnings
over time in the most advantageous manner to support the Group's strategy.
In October 2016, we commenced a $100 million share repurchase programme, which was 35% complete as at 31 December 2016. The
repurchase programme is expected to be completed in the coming months, and details are given in Note 21 to the financial
statements.
The Board is proposing a final dividend for 2016 of 4.5 cents per share, which together with the interim dividend of 4.5
cents per share, equates to the adjusted net management fee EPS for 2016 of 9.0 cents per share. The reconciliation of
adjusted net management fee EPS to the statutory loss is provided in Note 9 to the financial statements.
The proposed final dividend equates to around $75 million, which is more than covered by the Group's available liquidity
and regulatory capital resources. As at 31 December 2016, the Group's cash, less those balances ring-fenced for regulatory
purposes, amounted to $361 million and the undrawn committed revolving credit facility was $500 million, as set out in Note
13 to the Group financial statements. The Group regulatory capital surplus, after these distributions, was $392 million at
the year-end. Man Group plc's distributable reserves were $1.8 billion before payment of the proposed final dividend, which
is sufficient to pay dividends for a number of years, and as profits are earned in the future the Company can receive
dividends from its subsidiaries to further increase distributable reserves.
Group income statement
$m Note Year ended31 December2016 Year ended31 December2015
Revenue:
Gross management and other fees 3 746 833
Performance fees 3 81 302
827 1,135
Income or gains on investments and other financial instruments 14.1 52 15
Third-party share of (gains)/losses relating to interests in consolidated funds 14.2 (15) 9
Revaluation of contingent consideration 2 40 (62)
Distribution costs 4 (61) (77)
Asset servicing 4 (33) (32)
Amortisation of acquired intangible assets 2,11 (94) (92)
Compensation 5 (405) (462)
Other costs 6 (176) (181)
Impairment of goodwill and acquired intangibles 2,11 (379) (41)
Share of post-tax profit of associates 18 2 3
Finance expense 7 (32) (34)
Finance income 7 2 3
(Loss)/profit before tax (272) 184
Tax credit/(expense) 8 6 (13)
Statutory (loss)/profit attributable to owners of the Parent Company (266) 171
(Loss)/earnings per share: 9
Basic (cents) (15.8) 10.1
Diluted (cents) (15.8) 10.0
Group statement of comprehensive income
$m Year ended31 December2016 Year ended31 December2015
Statutory (loss)/profit attributable to owners of the Parent Company (266) 171
Other comprehensive (expense)/income:
Remeasurements of post-employment benefit obligations (17) (21)
Current tax credited on pension scheme 4 4
Deferred tax credited on pension scheme 3 2
Items that will not be reclassified to profit or loss (10) (15)
Available-for-sale investments:
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