Will Q3 net flow volatility trigger a decline in Man Group shares?

UK asset manager Man Group performed well in the first six months of the year. However, current market volatility may have led to significant outflows in the three months to the end of September.

Inflation and less favourable sterling to dollar exchange rates are likely to be in focus when UK investment firm Man Group [EMG.L] delivers its third-quarter update on Wednesday 19 October.

As has been the case with the majority of asset managers, the Man Group's share price has cratered in recent weeks. The stock has fallen 11% in the past month to 218.30p at the close on 17 October, closing 21.2% down from its 52-week high of 277p set on 22 July. It’s trading 23.1% above its 52-week low of 177.30p set on 7 March, when investors exited positions due to concerns about the potential economic fallout from the Russia-Ukraine war. In the year-to-date, the stock is flat at 0.5%.

Looking at the company’s previous results, total returns for the first six months of the year were a negative 6.9% and long-only strategies returned a negative 12.5% due to exposure to fixed income and equity markets. However, its absolute returns were 8.8% and were led by robust performances in its suite of AHL funds, which use data science and machine learning to identify a range of diversified instruments to invest in. For instance, AHL Alpha returned 11.3% and AHL Diversified returned 17.2%.

Robust half-year figures

The value that “uncorrelated investment strategies and solutions can bring to portfolios” resulted in a 28% year-over-year increase in earnings per share and net inflows were $3.2bn, 2.7% above the broader asset management industry average. This reflects “the attractiveness of our differentiated business model,” said CEO Luke Ellis (pictured) in the company’s half-year earnings release on 2 August.

Pre-tax profit leapt 35.7% from $280m in the first half of 2021 to $380m. While assets under management rose by 5.2% over the same period to $142.3bn, they dropped by 4.2% from 31 December. This was attributed to foreign exchange headwinds from a strengthening US dollar.

The group warned of near-term volatility in flows due to inflation, but Ellis said he was optimistic that the company should hold up well because of “high performance fee potential and a good level of client engagement”.

Headwinds may push against inflows

Wednesday’s trading update may paint an entirely different picture, however. Since the half-year earnings release on 2 August, the pound has fallen to an all-time low against the dollar. This could well have impacted Man Group towards the end of the third quarter.

Asset managers around the world have also been reporting major outflows from their funds over the past couple of months amid rapid inflation and interest rate increases. The question is whether the group will indicate a similar impact on its business.

Investors will therefore be keeping an eye on net inflows and any comments Ellis might provide as to the outlook for the fourth quarter and the early part of 2023.

Consequently, the amount the group is able to return to shareholders at the end of the fiscal year could potentially be impacted. In August, it recommended an interim dividend of 5.6 cents per share, the same it paid out in the first half of 2021. A final dividend of 8.4 cents per share was paid out for the second half of 2021. Last year’s total dividend of 14 cents was up from 10.6 cents in 2020.

Analysts rate Man Group shares as ‘outperform’

While there are no analyst estimates for Man Group’s third-quarter earnings, brokers are generally bullish on the stock. Of 12 analysts providing ratings to the Financial Times, two rated the stock a ‘buy’, seven say it will ‘outperform’ and three advise to ‘hold’.

Analysts are optimistic on the trajectory of its idling share price as well. The 12 analysts providing a forecast to the Financial Times gleaned a median target of 295.39p an upside of 38.1% from its last close of 213.90p on 14 October. Its low target of 233.63p would see the stock growing by 9.2%, while the most optimistic analysts see the stock rising 81.2% to 387.59 within the coming year.