Man Group plc Trading Statement Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

STANLEY FINK, CEO AND MANAGING DIRECTOR, MAN GROUP PLC: Good morning ladies and gentlemen. I would like to start off by introducing my colleagues on the podium. We have Chris Chambers who is a member of the Group Board and the Chief Executive of Man Investments. Confusingly sitting next to him is Mark Chambers, who did come first, who is head of European Sales and is temporarily sitting in as Global Head of Institutional Sales. Next to him Hans [Tischauser]who is Head of Product Design Structuring and Management, PDSM we call it; I've probably got the acronym wrong. To come, you will have Victoria Owen who is the Co-Head of Man Global Strategies and is involved in building the portfolio for new managers. David [Highton] who is our Chief Investment Officer, sitting at the front.

Before I start, I think it is worthwhile reading out the Press Release that we issued this morning, copies of which you all have. It might be best to take questions before we go into the main Presentation.

I will read the Press Release in case any of you haven't had a chance to. Then we will take a brief q-and-a and then we will go into the set piece presentation.

The Pre-Close Trading Statement. Man Group, the global provider of alternative investment products and futures broker, is today hosting a Presentation by Senior Management for analysts and investors on the Man Investments business. At today's Presentation, Stanley Fink, the Chief Executive to the Man Group, will make the following comments. Indeed, he will.

Demand for our Fund Products has continued to be strong, and the increase in funds under management due to sales in the six months to 30 September 2003, was over $5b. Man Group funds under management at today's date are estimated to be over $30b, up from $26.7b at the year end and include $12.5b for RMF at 30 September, up from $11.1b at 30 March. These figures do not include the latest launch, Man Global Strategies Diversified Ltd, which will close in early October.

Net management fee income will be up by 50% on the six months to 30 September 2002, reflecting the increased level of funds under management. Net performance fee income will be only slightly lower than last year. Brokerage net income, excluding exceptional items, will be up at least 50% reflecting the continued recruitment of producer teams, active markets and the successful integration of GNI, which has now been substantially completed. Fully diluted underlying earnings per share are expected to be up over 40%.

Man Group will announce the Interim Result on 6 November 2003.

I don't have Peter Clarke our Group Finance Director with me, to take any q-and-a we have on the Trading Statement. In a generic sense, we obviously will be giving a lot of more detailed analysis at the time of our Interims. If there are any burning questions, it is probably best to deal with them now, rather than wait until after the Presentation.

Given that there are no burning questions, we will move on to the detailed Presentation.

I believe you have all got copious slide packs with you. If you turn to the slides the first one is of our general warning. Going into the Presentation, I am starting now to do most of the introduction with Chris Chambers covering Man's business model. Chris did volunteer to do all of this, but he had to travel last week on a rather expensive business trip. So I had rather more time to prepare the slides, hence me volunteering for this.

Before we start the Presentation, we did decide to give you an unusual format this year of the seating plan. We thought 1) it would be helpful given the copious notes you all have. Secondly we were trying to avoid one of the pitfalls of last year, where one member of the audience succeeded in falling asleep throughout three quarters of the Presentation. What was even worse, having fallen asleep they then went back to the office and proceeded to [short] the stock.

So if any of you see people dropping off next to you, first of all, I would urge you to nudge them gently, or perhaps not so gently. More importantly, if you do happen to fall asleep, notwithstanding that, go back and buy the shares, in which case we won't embarrass you next year.

The first slide you will have seen before, those of you who have seen our regular Presentations. What it shows in principal - you'll find that my Presentation is to some extent going over new ground, and the others will go into detail. What you can see from this is we are old; we are 20 years old in what is a young industry. We are large, $30b+ we are probably the largest player by a factor of 2 in the industry. We have a very comprehensive product range. We are very creative; we have pioneered many new structures. Finally, we are a big business with strengths in debt.

Many of you will have only had the chance to meet Harvey, Peter and I at normal road shows, but the truth is that in the Asset Management business, as well as in our Brokerage business, we do have fabulous strengths in debt and we really work as a team. Today is a great opportunity to meet a small additional cross section of that team in Man Investments - I have introduced you.

The other thing that this slide is meant to point out is that many common [indiscernible] say that the world of Hedge Funds is not only opaque, but also it is unregulated. At times, we wish it were so. I think we counted up we actually have about a dozen regulators, who affect the Man Group business, which is largely conducted - many of the activities are on-shore, but we do have a sort of massed regulator in the FSA. Given the number of regulatory visits we have going on around the world, I feel like we are one of the most over or regulated industries in the world, not an unregulated industry.

When Chris joined us he said to me, what is the most important thing I can do for the business? I said to him, well interestingly in 20 years selling across 70 or 80 countries we have never had a single regulatory complaint upheld against us. Your job is to make sure over the next 20 years that the same can be said. So if you do ever read about a regulatory problem with the Man Group, remember, it is Chris not me.

Business philosophy. As we proceed managing this fairly large and complex business, there has been one shining light that really guides us. This actually does differentiate us from many other people who design product structures. We really believe that the key to long-term success is a close alignment between client's legitimate expectations - and I do use the word legitimate, because some client's do get unreal expectations on what we can actually deliver. Having products that deliver what they say on the tin, we think is the key to earning some management business success.

Now it sounds very trite, rather an apple pie, but it is not necessarily true of much of the investment industry at large, the hedge fund industry perhaps in particular. I guess the mission in the services of the hedge fund world would probably be the first named brand that people think of. When they think of hedge funds we want to be it. Today, that is largely true; I would say in the USA that is not true. Probably in one or two other areas of the world, like Japan maybe it is not. Generally, in most of the rest of the world where hedge funds are sold, Man is the first name and is more or less synonymous with the industry. We want to try to complete that and build on that brand strength and awareness.

So those are our two shining lights. One of the key things I was asked to do, is to look at where the industry is going and how we would fit into that. So just going down into a little bit more of the detail. To start off looking at where the industry is going, it is always interesting to look backwards. David Highton our Chief Investment Officer repeats a quote from some famous individual, whose name now escapes me, but David will remind me I am sure.

That history does not always repeat itself, but it does have a habit of [lining]. I think in that, what we mean is, this industry has grown up by [over] 20% per annum for the last 13 or 14 years. Most of that growth has actually been achieved in a bull market. Although this industry was not derailed by bear markets it wasn't even derailed by LTTN.

Having said that, David Highton in his Presentation will go on to describe, that beneath this fairly smooth growth in both numbers of funds and numbers of amounts of assets, there have been huge variations of changing themes. For example, 10 years ago global macro dominated the industry. Today equity [long-short] is probably the dominant factor. Other strategies like equity short selling, fell by the wayside, only to return in the last year or so. So David will talk about some of the changing themes.

In a way, what you should think about the industry is a collection of absolute return strategies. Some of which have very little else in common with each other, except that the general investment management market in our view is polarized in between passive managers, who are mainly providers of beta and managers who are looking for absolute returns, that provide mainly alpha.

That does not mean, by the way, that we believe that the normal fund management industry is dead. We just believe that on the periphery a little more than 1% or 2% of the industry will continue to grow. We do not believe that the growth will stop simply because the markets have returned to a bull market. Because we sell the products on the basis of diversification, and we believe that the lessons of this bear market will be in people's consciousness for probably 15 years is my guess, some it will be 10 some it will be 20, some maybe longer.

It has been a very severe bear market, which has caused people to lose money the way the '87 bear market did not, it was seen as more of a short-term correction. So we think the need for diversification will be around for the next 10 to 15 years. Perhaps then people will forget.

If you bear that in mind in the argument, then look forward another 7 years, you extrapolate where the industry might be going. These are just mathematical extrapolations they are not forecasts or predictions I should add. Clearly at 10% per annum, which would be the rate of growth halving, you can see this is going to be a $1,500b (one and a half trillion) industry $1,500b under management with 12,000 participants.

If you actually do the curve at 20% per annum compound where continuing, then these numbers will actually double. That is the power of a 10% differential for 7 years. These are very big numbers, scary numbers in a way, because one of the questions will be, who will capture these assets. We believe that we will be one of the biggest capturer of these assets. Secondly, where will this money go and how does capacity look for the industry? These are themes that David will talk about later.

Finally, which [indiscernible] of managers will succeed in the future. Indeed will there be any new styles of absolute return strategies coming along, helping mop up some capacity. We believe there will and I will talk about that in a second and David may build on that theme if he has time.

If you look today where these absolute return strategies are, where the money is. This is a slight modification of our old slide, which didn't use to include Fund to funds on the periphery and it didn't include global trading, global macro and emerging markets, which we have now put in the middle, because it sort of straddles the others. Interestingly, most people coming into this hedge fund industry today are sort of coming in from the top left through secured selection.

They are teams of stock pickers, in some cases even analysts who have found that they are very good at predicting stock movement and if they can make money on one side and beat the index, why not try and make more money as a long-short manager? That now has probably the highest number of entrants and probably the highest number of failures, because then people find it is rather more difficult.

What is different about us is that we came in through the bottom right. We have branched out into the industry. There are many other examples of people who have done that, [indiscernible] more capital [indiscernible] all coming from this angle, and other very successful traders. I guess it changes your focus because we find there is nothing logical about always being wrong in the stock market, which if you like colors our views.

Whereas if you come in from the top left hand block, most people who do always retain a long-bias in their portfolios. Whereas we try and go as close as we can to market neutrality, typically because we know our products are going to be sold to people who already have a lot of beta. So we tend to be primarily sort of low beta products.

My guess overall is that all of these assets [indiscernible] grow at the time the markets themselves grow, I would not be surprised if global macro and multi-strategies grow the fastest. Because they allow their hedge fund manager to make opportunities to put these monies to use, and indeed have produced some very returns over the last year or so. To be honest, often the asset flows follow the returns.

Our plan is to cover all of those styles. So no matter where the growth is we would expect to have some flagship products, and indeed style funds that cover those strategies.

As we look forward to what might be the next absolute investment styles, we put down some ideas before. We have done various amounts of work on these. We actually believe that some of these asset classes could be huge. I take [indiscernible] reinsurance in particular and tapped on. What was the groundbreaking bond issue for us was one that had been issued by the Football World Cup; they had actually issued a [indiscernible] catastrophe bond.

This is totally new, but we are getting to the fact that some of the potential catastrophes are beginning to outstrip the balance sheets for the biggest insurance companies, who for regulatory reasons will not be able to reinsure these huge risks or the cost of capital doing so will be very large.

We would expect that the difference mediation that will happen here, similar to the difference mediation that happened in the banking market, would create a whole new class of catastrophe reinsurance bonds. A bit like credit derivatives have become a major market. We think this will be a great area for hedge funds to play in.

Weather derivatives. I read a study, it took me a double take to believe, that claimed over 50% of human economic activity was weather driven in one way or another. When you hear that statistic at first it makes you say, it can't be so. But then when you start to read about energy prices, you start to think of agricultural crops and sporting events. Even down to people having outdoor weddings and things. You start to realize how much really depends on the weather.

There are no weather derivatives really in existence today, but I believe they will exist. They will be very liquid and they will provide opportunities for hedge funds. Some analysis we sourced suggested that they could become as big as the energy futures going forward, and would be obviously complementary to those.

Physical commodities. A huge number of very big physical commodities exist today that don't really have future markets. Steel will probably be the biggest single one, through to many other physical commodities. Also in some cases there are OTC contracts, and there are futures contracts and exchanges that don't have adequate clearing mechanisms, like the Brazilian exchanges, but we and others don't trade.

I think mechanisms will be found to allow people to trade South American coffee futures, which is different from normal coffee futures in a way that makes them feel safe. So there will be a lot of room for the futures managers there.

Finally there are one or two new strategies coming along. I saw a big hedge fund that basically had started up from what in effective was a virtual commercial bank. Where they had taken all of the overheads of the bank and were beginning to run a bank, buying assets, [indiscernible] market assets, and issuing bonds against them.

We have also seen people in effect re-insure the contingency fees of big US mass transaction lawyers. You get a small firm that has got a billion dollars of contingency fees on some tobacco suits, but they are funding $200m or $300m of work in progress. Somebody who can provide them with that funding, non-recourse, it's a really great product for them. It may not be good for [indiscernible], but it's a good product for potential hedge funds. There are one or two hedge funds starting to fund those now.

So I think the world of [indiscernible] ingenuity will grow with the size of the opportunity. What I just want to describe, without being very specific, was to explain to you that the world of absolute strategies in my view does not stop where we are today, it will progress over the next 7 years. We would expect to be in many of those areas.

If you look how man fits into this world, one of the sobering thoughts I have is that when we look today at the number of hedge fund managers that either Man owned, we had relationships with and in some cases investments with from Man Global Strategies, that David and Victoria will talk about later. Glenwood and RMF, we actually had over 250 managers out of this population of 6000 to 7000 of hedge funds. We had relationships with over 250.

For any of you that are really alert this morning that will have added up those numbers very quickly, you might get to 325. You might want to [indiscernible] check that. Now the reason we are saying over 250 is that [indiscernible] back in draft counting, some of the managers twice where the managers trade two different styles. That was just a trick question, because I saw the stat 250 and I had 325, but I think it's a double count.

One of the interesting things about having this number of managers, we have also got managers with whom we have got managed accounts. We are now up to more than 50 managers I believe including Man's own, saw 25 put RMF platform. That means for the first time we can produce a diversified fund of funds as managed accounts, which give a much higher level of transparency and indeed a higher level of liquidity than most traditional hedge funded funds. It is a product that we believe will be highly sought after. Those are institutions that demand a use for liquidity and weren't [indiscernible] …