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Man Group plc (EMG)

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Wednesday 11 March, 2020

Man Group plc

Annual Financial Report

RNS Number : 7735F
Man Group plc
11 March 2020
 

Man Group plc

In compliance with Listing Rule 9.6.1 the following documents have been submitted to the National Storage Mechanism and will be available for inspection at http://www.morningstar.co.uk/uk/nsm     

1.  Annual Report for the year ended 31 December 2019 (the "Annual Report")

2.  Notice of 2020 Annual General Meeting (the "AGM Notice")

3.  Form of Proxy for the Company's 2020 Annual General Meeting

In compliance with DTR 6.3.5 the following information is extracted from the Annual Report and should be read in conjunction with the Group's final results announcement of 28 February 2020. 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 Annual Report.  The Annual Report and the final results announcement can be viewed and downloaded at our website www.man.com together with the AGM Notice.

Principal risks

The trend of the risk in 2019 is shown as;   /\ (increased), <> (unchanged) or \/ (decreased).  

 

Risks

Mitigants

Status

Trend

Business risks

 

Investment performance

Fund underperformance on an absolute basis, relative

to a benchmark or relative to peer groups could reduce

FUM and may result in lower subscriptions and higher

redemptions. This risk is exacerbated at times of volatile markets. This may also result in dissatisfied clients, negative press and reputational damage.

 

Lower FUM results in lower management fees and

underperformance results in lower performance fees,

if any.

 

Man Group's investment businesses each have

clearly defined investment processes designed to

target and deliver on the investment mandate of each

product. We focus on hiring and retaining highly skilled

professionals who are incentivised to perform within the parameters of their mandate.

 

Man Group's diversified range of products and strategies

limits the risk to the business from underperformance

of any particular strategy.

2019 has seen good absolute performance, particularly

for Man AHL and the equity long-only products. However, relative performance to peers has been weaker for the large valuation focused strategies such as Japan CoreAlpha, Emerging Market Debt and those within Man Numeric.

 

Although FUM increased largely due to the rallying equity market, there were modest outflows following weaker short-term relative performance.

 

The discussion of Man Group's performance is on pages

18-21.

^

Key person risk

A key person to the business leaves or is unable

to perform their role.

 

Retention risk increases in years of poor performance.

Business and investment processes are designed

with a view to minimise the impact of losing any key

individuals. Diversification of strategies reduces the

overall risk to Man Group.

 

Succession plans and deferred compensation schemes are in place to support the retention of senior

investment professionals and key management.

Man Group has continued to be able to attract and

retain an array of talented individuals across the Group, however voluntary staff turnover has been increasing.

 

The departure of the Group President and the transition

to the new Board Chairman has proceeded smoothly.

 

We continue to operate a succession planning process to manage this risk.

<> 

Credit Risks

Counterparty

A counterparty with which the funds or Man Group have

financial transactions, directly or indirectly, becomes

distressed or defaults.

 

Shareholders and investors in Man Group funds and

products are exposed to credit risk of prime brokers,

custodians, sub-custodians, clearing houses, depository

banks and guarantee providers.

Man Group diversifies its deposits across a number

of strong financial counterparties, each of which is

approved and regularly reviewed for creditworthiness

by the Counterparty Monitoring Committee (CMC).

The CMC also oversees contingency planning ahead

of significant market or political events.

 

The Group Risk function monitors credit metrics,

such as CDS spreads and ratings, of the approved

counterparties on a daily basis.

Increased regulatory scrutiny, stress testing and capital requirements for investment banks and central clearing houses supports the overall stability of Man Group's core counterparties.

 

2019 saw credit spreads tighten for most names and

there were no periods of heightened concern for any

material names.

<> 

Liquidity Risks

Corporate and fund

Volatile markets can place additional, often short-term,

demands on the balance sheet. Man Group is exposed

to having insufficient liquidity resources to meet its

obligations.

 

Adverse market moves and high volatility may sharply

increase the demands on the liquid resources in Man

Group's funds. Market stress and increased redemptions

could result in the deterioration of fund liquidity and in the severest cases this could lead to the gating of funds.

Man Group has access to a revolving credit facility (RCF),

and maintains a liquidity surplus. Liquidity forecasting,

including downside cases, facilitates planning and

informs decision making.

 

The investment risk teams conduct regular liquidity

tests on Man Group's funds as well as peer fund reviews.

We endeavour to manage resources in such a way

as to meet all demands for fund redemptions according

to contractual terms.

The RCF has been renewed at $500 million for 5-7 years

across 14 Tier 1 banks, providing the Group with a robust liquidity backstop.

 

The asset liquidity distribution across funds has remained broadly unchanged. In response to liquidity issues faced

by other asset managers, detailed case reviews have

been carried out. This has led to enhancements in our

liquidity analysis toolkit and reporting.

<> 

Market Risks

Investment book

Man Group uses capital to seed new funds to build

our fund offering and expand product distribution. Man Group is therefore exposed to a decline in value of the seeding book.

A disciplined framework ensures that each request for

seed capital is assessed on its risk and return on capital.

 

Approvals are granted by a Seed Investment Committee

(SIC), which is comprised of senior management, Risk

and Treasury. Investments are subject to risk limits, an

exit strategy and are hedged to a benchmark where

appropriate. The positions and hedges are monitored

regularly by Group Risk and reviewed by the SIC.

The seeding book reduced in size over 2019, along with

its downside risks. Overall seeding book returns for 2019 were positive, with the hedges performing as expected.

 

Some liquidity has been released by sourcing repo

financing for CLO risk retention positions and swap

financing for hedged long-only fund positions. Man Group retains the market risk to these positions.

<> 

Pension

Man Group underwrites the risks related to the UK

defined benefit pension plan which closed to new

members in 1999 and future accrual in 2011. The plan

is well funded, but is exposed to changes in net asset

versus liability values.

The UK pension plan has a low net exposure to UK interest rates. The return seeking assets are low volatility and have a low correlation to equity markets. Longevity is the largest remaining risk, but is uncorrelated to Man Group's other risks.

The scheme has a surplus on an accounting basis and a small deficit on an actuarial basis. The actuarial deficit has reduced over 2019 with improved performance of the underlying assets.

<> 

Operational risks

Internal process failure

Risk of losses resulting from inadequate or failed processes within Man Group.

The Group's risk management framework and

internal control systems are based on a three lines

of defence model.

 

Internal Audit evaluates the effectiveness of the Group's

risk management, control and governance processes.

The Group remains focused on enhancing its systems

and control processes where required and ensuring

internal process failures are kept to a minimum.

<> 

External process failure

Man Group continues to outsource a number of functions that were previously performed internally as well as managing outsourcing arrangements on behalf of its

funds. The risk is that the outsourced service providers

do not perform as required, resulting in knock-on implications for our business as a whole.

Man Group's operations team has implemented a robust

methodology (including ongoing third-party due diligence

and KPI monitoring) to confirm that outsourced service

providers are delivering as required.

The Group continues to concentrate its outsourcing

into a smaller number of carefully selected and proven outsource providers with which it has established working relationships allowing for greater process consolidation and rationalisation.

<> 

Information and cybercrime security

The risk of loss resulting from cybercrime, malicious

disruption to our networks or from the theft, misplacing,

interception, corruption or deletion of information.

Man Group has a mature information security

management programme which governs current

and future strategy.

 

The Group has deployed cyber controls and countermeasures

which are continuously reviewed, maintained

and adjusted in line with our assessments and those

of trusted advisors. These security mechanisms are

deployed in a layered defence involving preventative,

detective, reactive and recovery controls. If one control

fails, other controls are in place to detect, prevent or

counter an attack. To keep pace with emerging risks,

some of the technology solutions are utilising

machine learning, artificial intelligence (AI) and

behavioural analysis.

 

The Group has a cyber-risk training programme and

has commissioned independent threat and security

assessments, including simulated staged attacks on our network to test our detection and response capability.

The threat from cybercrime groups continues to grow,

with many of these groups executing sophisticated attack campaigns with expertise only seen in previous years

from nation states or state-sponsored hacking groups.

 

Throughout 2019 social engineering-based attacks

remained the primary delivery technique - criminal

elements attempt to gain access to sensitive corporate or private data with an ultimate goal of stealing and then selling the data to the highest bidder. Alternatively, they may deny the data owner access to their data altogether and then demand a ransom for its safe return.

<> 

Information technology

Risk of losses incurred by IT software and hardware

failures resulting in system downtime, severely degraded

performance or limited system functionality.

The Group recognises the fundamental role of

technology in delivering its objectives and IT functions

work closely with other business units to ensure work

is correctly prioritised and financed. The prioritisation

process considers the lifecycle of both hardware and

software to ensure both are adequately supported and

sized. The Group's operational processes include mature

risk, incident and problem management procedures to

minimise the likelihood and impact of technology failures.

During 2019 the Group continued to improve its

technology capability with the completion of a new

Finance and HR platform and ongoing enhancements

across the trading and operations systems.

 

New hardware investments were made to support the

Group's Quant Research platform, as well as a major

refresh of our end user computing systems.

<> 

Legal and regulatory

The global nature of Man Group's business, the

expansion of its investment businesses and the acquisition of new investment businesses, with corporate

and fund entities located in multiple jurisdictions and a

diverse investor base makes it subject to a wide range

of laws and regulations. Failure to comply with these

laws and regulations may put Man Group at risk of fines,

lawsuits or reputational damage.

 

Changes in laws and regulations can materially impact Man Group or the sectors or the market within which it operates.

Man Group operates a global legal and compliance

framework which underpins all aspects of its business

and is resourced by experienced teams. These teams are physically located in Man Group's key jurisdictions,

helping them to understand the context and impact

of any requirements.

 

Emphasis is placed on proactively analysing new legal

and regulatory developments to assess likely impacts

and mitigate risks.

 

Man Group continues to liaise directly and indirectly

with competent authorities e.g. FCA, SEC, FINMA, CBI.

Man Group continues to experience new regulatory

requirements. In 2019 this included the Senior

Managers and Certification Regime ('SMCR')

which was successfully implemented.

 

Work is already underway on a number of regulatory

initiatives including IBOR transition and the new

prudential regime for EU investment firms.

<> 

Brexit

The Group faces legal, tax and regulatory uncertainty

which could impact the ability of funds to access markets

or cause investors to redeem.

 

Fund performance may be adversely impacted by market

volatility or reduced liquidity.

 

Operational events may result from an elevated volume

of legal or operational tasks.

Man Group has upgraded the regulatory permissions

of its Irish entity and has opened an office in Dublin

to serve European clients.

 

The fund risk toolkit includes market and liquidity scenarios focused on downside Brexit risks.

The UK Government has committed to fully exiting the

European Union at the end of 2020, following a transition period. The exact nature of the final agreement may impact market infrastructure and regulations.

 

The Group is monitoring developments closely and will take the necessary steps to ensure that the impact on

the business, investors and employees is minimised.

<> 

Reputational Risks

Negative Publicity

The risk that an incident or negative publicity undermines

our reputation as a leading investment manager.

Reputational damage could result in significant

redemptions from our funds, and could lead to issues

with external financing, credit ratings and relations

with core counterparties and outsourcing providers.

Our reputation is dependent on both our operational

and fund performance. Our governance and control

structure mitigates operational concerns, and our

attention to people and investment processes are

designed to comply with accepted standards of

investment management practice.

Man Group continues to enjoy a good reputation and this risk is assessed as stable.

<> 

Emerging Risks

External Risks

Primarily external in nature and complementary to the

principal risks which are focused on current internal

risk. The emerging risk categories include natural

disasters, pandemics, disruption to financial markets

and business infrastructure, political risk and changes

in the competitive landscape.

The Board and Group Risk monitor emerging risks,

trends and changes in the likelihood of impact.

This assessment informs the universe of principal

risks faced by the firm.

The emerging risks have been reviewed by the Board in 2019. No changes were made to the Group's headline

principal risks.

 

The coronavirus (COVID-19) outbreak has transitioned

from an emerging risk to a business continuity

principal risk.

<> 

 

Related party transactions

Related parties comprise key management personnel, associates and fund entities which Man is deemed to control. All transactions with related parties were carried out on an arm's length basis.

 

Refer to Note 17 for details of income earned from associates. Management fees earned from fund entities in which Man holds a controlling interest are detailed in Note 13. Contingent consideration payable to Aalto management is outlined in Note 26.

 

The Executive Committee, together with the non-executive directors, are considered to be the Group's key management, being those directors, partners and employees having authority and responsibility for planning, directing and controlling the activities at Man.

 

 

 

Key management compensation $m 

Year ended 

31 December 2019 

 

Year ended 

31 December 2018

 

Salaries and other short-term employee benefits1

29

30

Share-based payments

13

12

Fund product based payment charge

9

8

Pension costs (defined contribution)

1

1

Total

52

51

 

Note:

1  Includes salary, benefits and cash bonus.

 

Man made a charitable donation of £2,500 to Greenhouse Sports Ltd during the year (2018: £25,500) and nil (2018: £7,200) was paid to VWA Search Ltd, a recruitment firm, which are considered related parties.

 

Directors' responsibility statement

Each of the directors, whose names and functions are on pages 58-59 confirm that, to the best of each person's knowledge and belief:

 

-  The financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

-  The Strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face;

-  The Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's and Group's performance, business model and strategy; and

-  There is no relevant audit information of which the Group's auditor is unaware, and that they have taken all steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that Man Group's auditor is aware of that information.

 

Enquiries

 

Alex Dee

Head of Investor Relations

+44 (0)20 7144 1370

 

 

Georgiana Brunner

Communications Director

+44 (0)20 7144 1000

[email protected]  

 

END.

 

 


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