Annual Financial Report

RNS Number : 5853Z

Man Group plc

19 March 2012

 



Man Group plc

In compliance with Listing Rule 9.6.1 and Disclosure and Transparency Rule 6.1.2, the following documents have been submitted to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do

1.       Report and Accounts for the nine month period ended 31 December 2011 (the "Report and Accounts")

2.       Notice of Annual General Meeting 2012 (the "AGM Notice")

3.       Form of Proxy for the Group's 2012 Annual General Meeting (the "AGM")

In compliance with DTR 6.3.5 the following information is extracted from the Report and Accounts and should be read in conjunction with the Group's final results announcement of 1 March 2012. The information reproduced below and in the final results announcement together constitute the material required by DTR 6.3.5 to be communicated in full, unedited text through a regulatory information service. Page numbers and cross references in the extracted information below refer to page numbers and cross-references in the Report and Accounts.  The Report and Accounts and the final results announcement can be viewed and downloaded at our website www.mangroupplc.com together with the AGM Notice.

Principal Risks and Uncertainties

As part of our risk governance framework we have created a risk dashboard, comprising more than 20 risk types faced by both the investment manager and Man. The status of these risks is regularly reported to the Executive Committee, Risk Assurance Committee, Audit & Risk Committee and the Board. The principal risks listed below are taken from the dashboard and are those that we believe could have a significant effect on our business in the current environment.

Fund underperformance risk Fund underperformance directly reduces funds under management and thus adversely impact potential management and performance fee income for the Company. Negative performance could have a proportionately larger impact for geared products, where investment exposure may be reduced on a leveraged basis. Furthermore, Man is exposed to the risk that investors redeem their investments because of poor performance, either on an absolute basis or relative to a benchmark, competitors or other investment opportunities.
Assessment Hedge fund strategies generally performed poorly in 2011 across the markets, as indicated by the 4.8% decline in the HFRI Weighted Composite Index. This decline marks the third year of negative performance since inception of the index in 1990, but the second such decline in the past four years.  Details of our fund performance are on page 35. AHL performance in 2011 was down 6.8%. Man regularly monitors its performance relative to competitors and attempts to attribute performance differentials. In 2011, approximately 70% of Man's revenues were generated from AHL products or products which allocate to AHL. The Group's profitability is therefore significantly affected by AHL investment performance. As of 31-Dec-2011, Man's FUM attributed to guaranteed products was approximately $10 billion. Due to the leverage in these products, their returns are more sensitive to underlying investment performance.	Response Although 2011 was a difficult year, Man accepts fund performance as a key business risk that also provides substantial upside revenue potential. The risk of negative investment performance from any particular strategy is mitigated by the diversified range of strategies and products that we offer our global client base. Products that have leveraged exposure are actively managed to ensure that investors' capital is preserved and managed in accordance with each product's mandate.
Counterparty risk In the course of 2011, there was increased market focus on financial institution capital and liquidity as a result of European sovereign exposure and decreased profitability. These events have highlighted the importance and benefits of proactive counterparty risk management, a result of which Man and its fund investors avoided any credit losses during the period.
Assessment Man has significant counterparty exposure with respect to its cash held on deposit (see Finance Director's review on page 17). Investors in Man funds and products are exposed to credit risk of prime brokers, clearing houses, futures clearers, depository banks and guarantee providers, if any. Furthermore, a default that causes Man or its investors to experience losses may adversely affect our reputation and could increase fund underperformance risk (see above). Amongst other tools and inputs that provide indicators of counterparty credit quality, Man monitors credit spreads of our main trading counterparties and banks as a forward indicator of their credit quality. During the second half of 2011, the average credit spread for banks nearly doubled to 400-500 basis points, which is considered stressed under current market conditions.	Response Man seeks to transact with the strongest financial institutions and to diversify counterparty risk. The Finance Committee meets regularly to review counterparties, reallocate exposures and set limits in line with Man's risk appetite. In 2011, Man decided to reduce business or terminate relationships with a number of banks or brokers which had significant exposure to Eurozone risks. AHL monitors counterparty risk for the exchanges and clearing houses where it chooses to trade.
Operational risk Operational risk arises from the potential for the Group to suffer losses due to inadequate or failed internal processes, people and systems or external events. This can include losses arising from fraud, unauthorised trading, mis-selling of products or errors in fund prospectuses, failures of due diligence or breach of investment mandate, operational/technology failures, and errors in investment algorithms.
Assessment Operational risk incidents could adversely affect the business and the prospects for Man. Operational risk is routinely monitored and assessed by Group Risk and Compliance through: 1) key risk indicators - these are identified by the business and reported to the Risk Assurance Committee and Audit & Risk Committee; 2) analysis of internal and external operational risk incidents - operational incidents are analysed and reported by the business to the control functions so that improvements can be made to the control framework. These incidents are reviewed by the Risk Assurance Committee and Audit & Risk Committee; and 3) operational risk scenario analysis - we model 21 different operational risk scenarios across the business. Each scenario is evaluated in terms of potential loss and expected frequency. Controls (and insurance when appropriate) are identified to mitigate risk of loss and the residual risk is evaluated against the Board's risk appetite.	Response The Executive Committee and the business are the first line of defence to ensure that controls operate effectively to mitigate operational risks. The directors and senior managers of the Group are committed to maintaining high standards of control and a risk aware culture to safeguard the Group's assets, reputation and franchise. The Group pays particular attention to operational and reputational risks relating to discretionary trading activities, product suitability, sales practices at intermediaries and the accuracy of its valuation and investor reporting processes. Independent custodial, fund administrators and valuation service providers are engaged to provide services to the fund products. A dedicated team monitors the quality and reliability of administration and valuation service providers. Significant resources are devoted to protecting the resilience of the Group's information technology systems, including formal business continuity plans and remote data back-up and disaster recovery facilities for each of its key locations. Business continuity is routinely tested to maintain effectiveness. An insurance programme provided by a syndicate of third party insurers is designed to maximise the breadth of cover in respect of key third party liabilities, loss of Group assets, business interruption and people related exposures.
Discretionary trading risk Monitoring and controlling the activities of discretionary traders to ensure the resulting trades are consistent with each fund's investment mandate and within Man's broader Risk appetite statements.
Assessment The investment managers operate under investment mandates for the funds. These mandates specify, to varying degrees, the types of instruments that can be traded, concentration limits, leverage limits, and the overall risk and return parameters of the products. In addition, many of the products are required to comply to regulatory requirements that further specify credit and concentration limits and liquidity constraints. The risk associated with a significant breach of a mandate could result in compensation by Man to the affected fund and potential payments of regulatory fines or sanctions.	Response The portfolio managers have automated processes to monitor at the desk level compliance with the investment mandates under which they trade. Within each investment manager there are dedicated risk management staff who monitor compliance throughout the day. The risk managers monitor positions against trading limits across a range of metrics including Value at Risk, position concentrations, stress events, scenario analysis and liquidity measures. Using internally developed risk management software, the team generates daily reports and can monitor intraday risks. This forms the first line of defence. The independent risk managers reporting to the Chief Risk Officer form the second line of defence. These teams monitor the investment managers and in addition perform scenarios to identify potential risks and tail events. The GLG Risk Committee, whose membership comprises the Chief Risk Officer and Chief Operating Officer for Man, the head of GLG investment risk and senior GLG traders, meets biweekly to review investment performance and risks as well as strategies and topical issues in the light of current market conditions. These processes provide risk control and oversight to the activity of the GLG trading desks, as well as providing transparency to firm-wide risk  management.
Reputation risk Our ability to gain and retain the confidence of our investors and intermediaries is highly dependent on building and preserving reputation as a leading alternative investment manager. This risk is driven primarily by our other principal risks, as any material failure could ultimately impair our reputation.
Assessment For Man, key aspects of reputation management include the avoidance of negative publicity and maintaining competitive performance of our products. Reputation risk is difficult to quantify. The effects of a failure to maintain our reputation could result in investor redemptions and an inability to market our products. This could result in a loss of profitability in our business.	Response Our reputation depends primarily on how we manage our principal risks. As reputation is also built upon perception, Man regularly communicates with its stakeholders to understand their current concerns and to help bridge any communication gaps. Our governance framework, including our risk appetite statements, are established by the Board and cascaded through the organisation. From these, policies and procedures are compiled that form part of the employee handbook which communicates to our staff important matters that help preserve our corporate reputation. Man has regular training to raise staff awareness of specific issues. All conflicts of interest and potential reputation risks are managed through the Risk Assurance Committee, the Audit & Risk Committee, and ultimately the Board.
Key person risk Man employs a talented array of individuals across our businesses. Their retention and the continued recruitment of additional professionals is a key priority for the future success of the firm.
Assessment Man operates a large distribution network and provides a broad range of investment management capabilities and products, thus minimising the impact of losing particular key individuals.	Response Man constantly aims to attract the best talent within the industry, and the historical strength of both the Man and GLG brands, together with our leading position in the hedge fund industry, is a key factor in helping us to achieve this objective. Man further mitigates key person risk through a firmly established succession planning process.
Regulatory framework risk Changes to the regulatory framework around Man's global business.
Assessment We are seeing a number of processes underway simultaneously: the finalisation and implementation of detailed rules in a number of key areas (e.g. OTC derivative clearing and the AIFM Directive); the negotiation of a number of further high-level 'framework' measures (such as the MiFID review); and the possibility of further, new regulatory measures (such as the possible implementation of a financial transaction tax).	Response Man has been planning around the new regulatory initiatives ever since their first emergence (e.g. the publication of the first draft of the AIFM Directive in April 2009). We have worked closely with regulators, trade bodies and other market participants to assess the potential impact of these changes on our investors and our business. Upon identification of new regulatory changes, responsibility for the analysis and assessment of the new measures and their potential impacts is allocated to affected groups within the team, who then take them forward.
Distribution legal risk Changes to rules around distribution of products to retail investors in certain jurisdictions.
Assessment Changes are being made to the UK regime around distribution of investment products to retail investors (for implementation at the end of 2012); a similar review is currently under discussion at the European level.	Response Man has formed a working group aimed at assessing and responding to these regulatory changes that has recommended a number of changes to prepare for these developments in the UK.

Related party transactions

Related parties comprise key management personnel, associates and joint ventures. Transactions with related parties include seeding and liquidity investments, loans to fund products, external re-financing guarantees, asset management performance, management and other fees, brokerage commissions, and interest and dividend income.

Total revenue earned from fund entities deemed to be associates, included in the Income Statement during the period was $177 million (31 March 2011: $314 million) and at 31 December total fee receivables and loan balances with fund entities deemed to be associates totalled $45 million (31 March 2011: $41 million). In addition, Man had entered into committed purchase agreements totalling $28 million (31 March 2011: $67 million) with fund entities deemed to be associates. All transactions with related parties were carried out on an arm's length basis.

Below are details of income earned from equity accounted associates

Investments in associates and joint ventures

$m	9 months to 31 December 2011	12 months to 31 March 2011
At beginning of the period Currency translation differences Disposal of BlueCrest Share of post-tax profit Dividends received Impairment of Ore Hill Acquisition of controlling interest in Ore Hill	68 - - 3 (3) - (27)	351 13 (227) 65 (112) (22) -
At period end	41	68

At 31 December 2011, the carrying value of investments in associates and joint ventures primarily relates to a 25% interest in Nephila Capital Limited, an alternative investment manager specialising in the management in funds which underwrite natural catastrophe reinsurance and invest in insurance-linked securities and weather derivatives.

On 3 May 2011, Man acquired the remaining 50% equity interest in Ore Hill for predominantly share based consideration, with it becoming a subsidiary undertaking at that date.

Associates are entities in which Man holds an interest and over which it has significant influence but not control. Joint ventures are entities in which Man has joint control through contractual arrangements. Investments in associates and joint ventures are recorded by the equity method of accounting and at cost plus (or minus) our share of cumulative post-acquisition movements in undistributed profits (or losses). Gains and losses on transactions between the Group and its joint ventures and associates are eliminated to the extent of the Group's interest in the entities.

Where Man has investments in certain fund entities over which it is able to exert significant influence but not control, these are classified as associates. Man has applied the scope exclusion within IAS 28 'Investments in Associates' for mutual funds, unit trusts and similar entities and has classified such holdings as investments and measured them at fair value through profit or loss.

Summary financial information of our associates has not been provided as it is considered excessive in length and is not considered meaningful. Details of all associates will be annexed in the Company's annual return.

Details of related party transactions with key management personnel.

Key management compensation is for those directors and employees classified as key management, being those having authority and responsibility for planning, directing and controlling the activities of Man. The Executive Committee was set up following the

acquisition of GLG and Executive Committee compensation has been included in key management compensation from its inception on 22 November 2010.

	9M 2011 $'000	FY2011(a) $'000
Salaries and other short-term employee benefits (b) Post-employment benefits (c) Share-based payments (d) Other long term benefits (d)	20,018 735 11,046 444	9,360 393 8,504 937
Total	32,243	19,194

Notes:

(a) After the acquisition of GLG, a new Executive Committee of the Board (Exco) was set up.   Staff that are members of this Committee are included in key management compensation above from the Committee's formation on 22 November 2010. Bonus eligible period for Exco was 1.2 months in FY2011 and 12 months in 9M 2011.

(b) Salary, benefits, cash performance bonus and mandatory share deferral and social security.

(c) Money purchase pension and defined benefit increase in transfer value pension benefit. Refer to table R20.

(d) Other long-term benefits relate to fund product deferrals. Refer to Note 20 of the Financial review section for further explanation of share-based and fund product based deferred compensation arrangements. Further information around share-based payments is also included in Note 14 of the Additional financial information.

Responsibility Statement

Each of the directors confirms that, to the best of their knowledge:

• the consolidated financial statements, which have been prepared in accordance with IFRSs as adopted by the EU and the parent company financial statements as prepared under UK GAAP give a true and fair view of the assets, liabilities, financial position and profit of the group; and

• the management report contained in pages 1 to 47 includes a fair review of the development and performance of the business and the position of Man, together with a description of the principal risks and uncertainties that it faces.

 

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