I was just reviewing Wexboy’s excellent recent article on asset managers. In the process, I uncovered a write-up on the asset manager EMG (Man Group) written by globalarbtrader on 03-Jan-2008. EMG has been "doing the rounds" lately, and is notable for its dividend yield of 15.6%. Significant if true.
(Globalarbtrader (Gat hereinafter) lists his job title as a hedge fund manager, so presumably he’d know a thing or two about asset managers. I’m going to summarise his post as of 03-Jan-2008 as succinctly as possible: extremely high ROE, high reputation and credit quality, economies of scale, considered a "legend" by private investors, stable flow of fees, but large proportion of profits come from a wholly owned hedge fund manager (rated less likely to "blow up" than funds requiring large leverage). If stock market gets hammered, more money is likely to flow into EMG because it’s a hedge fund. Good track record of acquisitions. Most of the money is from institutions, where margins are lower, and holding time shorter. Increasing competition, so likely fee pressure. Portable alpha is all the rage. Gat rates it as an excellent long term hold (he himself holds). Few firms will be growing their earnings as fast as EMG. It will make money whatever the direction of the market, is being priced as if it had a large basket of CDOs, and people are worried it could blow up at any time like other hedge funds. Gat dismisses this view. Dvidiend covered 6 times. He adds a postscript that he invested in Carter and Carter, which turned out disasterously.
Gat’s post garnered 29 recs, and seems very convincing to me. He added a couple of threads, which I’ll try to summarise the most important bits. One thread he referenced was to "TheMuffinman" (hereinafter as "MM"), who actually worked for EMG. The post was written on 16-Aug-2007. Here goes: some of their funds were performing badly: "not good news, but not a meltdown … yet". He speculated that redemptions might be a problem. There was director buying, and share buybacks. EMG is cash-rich. It can perform in both a bull and a bear market. Long term track record, and no reason to suggest this will not continue. Not for widows and oprhans. His post garnered 118 recs.
Gat also referenced another MM post, the gist of which is: by far the best course is to go into a hedge [as opposed to a bank] and that hedge, is of course Man Group plc (EMG), share price unfairly dragged down.
So how well would you have done if you had taken the plunge and bought in on 04-Jan-2008? Not well, as it turns out. The share price has dropped about 86% during the period, going down from around 516p then to 79.50p now. Operating profits declined from $1.9bn for y/e 31-Mar-2008 to $0.3bn for y/e 31-Mar-2011. Ouch. So much for the theory that EMG makes money in both up and down markets.
Yesterday, a poster on on Motley fool copied this from Numis:
Man Group may not be worth more than liquidation value … here is ultimately just too much uncertainty for anyone to reasonably predict the medium to long term earnings potential for AHL/Man today and thus we would not consider the stock investable, unless it were to fall well below liquidation value. Numis estimates Man Group’s liquidation value at between 50p and 75p a share
Ouch. Double ouch. Some interesting observations on the thread. One suggested that although absolute returns might be generated in both bull and bear markets, it needs "direction" in order to work. In other words, the strategy was confounded by high volatility of the markets during the last few years. I’m not saying that’s necessarily true reason (although volatility has definitely been high), but it’s something that the original posters hadn’t even considered was a factor. That idea was dismissed by another poster, though, who said that markets have trended strongly since March 2009. "The fact that these algorithm have failed to perform well or have done well and yet done nothing for the shareholder but lose money, in a period that has been described as the most trending market since the 1930’s tells me all I need to know about the folk at EMG." "Volatility is a problem because of the whipsaw effect. AIUI AHL loads it’s positions as the trend grows."
It’s what you don’t know that will kill you. The purpose of my post is not to poke fun of the people involved – hell, I’ve made my fair share of bad investments – but it does show that well-reasoned arguments who might be considered experts and/or insiders can still get it horribly wrong. It’s a zany world out there.
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