When, last summer, John Morrison agreed to take on the position of CEO of Man Investments he was being promoted to the senior management of a company that was already very successful. Man Group has been a quoted company for many years and has grown to assume a position as the UK’s 47th largest quoted company by capitalisation, making it a constituent of the FTSE-100 index. At the time Man Group was already generating statutory profits before tax of more than a billion dollars, and had then a post-tax ROE of 29.8%. Morrison now heads Man Investments, the hedge fund management arm of Man Group, and it constitutes roughly 85% of the Man Group’s business; the remainder is the Man Financial brokerage side.
An indicator of the long-term success of the business is that Man Investments was recently named as the European Asset Management Firm of the Decade by Financial News. The citation says that the award was in recognition of the pivotal role Man Investments has played in the development of the hedge fund industry as well as the asset management industry as a whole over the past 10 years. This means that John Morrison has one of the top jobs in the whole of the hedge fund industry, and is atop an organisation that was already doing very well before he took control.
“The challenge now is to maintain this momentum and to build on the strong foundation laid by Stanley Fink (CEO of Man Group) and others over the past 20 years,” John Morrison said.
As the official biography shows John Morrison is an Australian lawyer by background, and just as Man Group has had dealings in Australia for some years, Morrison had dealings with Man prior to joining them.
Man in Australia, and its man in Australia
Man Group has been involved in Australia since 1986. It has offices in Sydney, Brisbane and Melbourne, with some 150 employees in total (about 4% of the headcount of Man Group). Man Investments Australia is a regional leader in structuring, marketing and administering strategic investments that offer diversification from traditional investments. The headcount underplays the significance of Australia to Man.
According to the company, the key private investor markets of Man Investments traditionally have been Western Europe (excluding the UK) and Asia Pacific (including Australia and New Zealand). Whilst Japan has been a good market for sales recently within Asia Pacific, the record of the Australian sales effort has been outstanding over the medium to long term. There have been periods in recent years when sales of hedge fund product by Man Group have been nearly half the market in Australia. Bearing in mind that Australia has a relatively mature market for investment and savings products with many providers, banks and intermediaries, this is quite an achievement.
That the quality of Morrison’s effort was appreciated by Man Investments was shown in November 2000 when Man took a 50% stake in the buyout of Ord Minett Strategic Investments (OMSI), its distributor in Australia. The initial stake was bought for a consideration of the equivalent of £22.9 million, and management owned the other half of the buy-out. In July 2003 Man acquired the 50% of OM Strategic Investments Limited (OMSI) which it did not already own. In February 2004 OMSI renamed itself Man Investments Australia, and in the nine months after acquisition, the additional 50% stake contributed £7 million to Man Group’s pre-tax profits, according to Man’s financial filings, showing part of the earnings power of the subsidiary.
Such buyouts can be for several reasons. When Vega Asset Management bought the marketers of its funds NOMOS/Nighthawk Partners it was reflecting that Vega had matured to the extent that it did not need to concede a fee split to sell product. And there are precedents of financial companies buying a company to get management – such as Michael Dobson’s Beaumont Capital being acquired by Schroders, and the buyout of Phoenix Securities by Morgan Grenfell in order to acquire the management talent of Sir John Craven. From the outside it looks as if Man was doing a bit of both, taking full control of the cash flow of the Australian marketing effort, and bringing in-house management with which it had worked well. The cost has not been minimal. The 2006 accounts (for the year to March 2006) show goodwill on the balance sheet of the parent company related to Man Investments Australia at $76m, and the goodwill partly reflects the ultimate cost of the earn-out of management’s interests by the parent. This sequence of events confirms that Man Investments’ new CEO was excellent at growing and running the business in Australia, and could cut a well-constructed deal. The Board of Man is looking for more of the same on a bigger scale.
Two initiatives in governance
Since becoming CEO John Morrison has taken a couple of initiatives at the centre of Man Investments to increase the oversight of and clarify the accountability for investment performance at the core investment management businesses. This has been done through the creation of two new entities: the Central Investment Management committee (CIM) and the Strategic Research unit.
Once a month CIM does due diligence into each of the content engines toensure that they can each meet their mandates. John Morrison meets with CIM as part of his management oversight of the business. “We are setting levels of volatility and levels of returns for each content engine, and then we monitor them against those targets,” he says.
Morrison has formalised centralised governance of the Man Investments operating companies for some business issues. “We now look at succession planning. We are looking at the levels of responsibility taken at the senior level: the bandwidth of the manager (job scope). We might express concern about the health of a manager – we might say: “We want you to employ two senior people in this area of your business.” The message is we want you to be entrepreneurial but we want you to have proper management regimes.”
The central management team at Man Investments is also looking at acquisitions for the whole business, whether the idea comes from a bank or from somewhere within the business. A two-person unit has responsibility to find them and look at them.
In an effort to create a cohesion across the businesses of Man Investments Morrison has brought the senior directors of each business onto the management board. “So at least once a month we all get together and talk over the issues of the business units. Stanley Fink and I are available to support what each of them is doing. Though they are positioned in different spaces (commercially) there is a lot of mutual respect between the leaders of the divisions (of Man Investments).”
The second new central body is the Strategic Research Unit set up by Man veteran Vicky Pakenham. She was one of the co-heads of MGS, and she, along with Stanley Fink and Christoph Möller, Global Head of Sales for Man Investments, were Morrison’s main contacts over the years he was dealing with what was then Man Investment Products Switzerland. Morrison says “Vicky is able to select managers, put together portfolios, and she is totally free to put products together across our content providers (MGS, RMF, Glenwood and Affiliated Managers). Vicky can use managers where the primary relationship is with any of the Man Investments operating companies. This is new for us. For example, say a client asks to build a commodity product. Well, RMF has filled capacity in its diversified commodity product, but they may have booked capacity with a number of their managers that has not been used. We can now look inside MGS and Glenwood and put together a Man Investments commodity package (fund of funds) for a couple of hundred million dollars for institutional or retail clients.
“So the strategic research unit can put together a product from across the content providers,” says Morrison. “Vicky Pakenham is working from a position of great knowledge herself, and can tap into the ideas generated within the content providers for product. Ideas come from me and Christophe Möller; from the sales-side or from Stanley (Fink). It can be looking for a new structure for a fund; it can be a pull-push between us, or it can be client-led.”
Client servicing and fees
One of the consequences of the increased involvement of investing institutions in the hedge fund business, according to Morrison, is an increased requirement for client servicing. “This area is a major challenge for the whole industry as the hedge fund business matures and comes to be considered as a fourth asset class. Increasingly all clients, whether institutional or retail, sitting down with an intermediary, will demand the same level of service from a hedge fund provider as they get from a UBS or a Citigroup in their mainstream assets. When it comes to client reporting, there is no doubt that the banks can provide a high level of information on their master programmes and the structures provided in them, and we have to feed into that. In the last few months we have spent £6.5mso we can readily provide that content to the banks that are our partners in distribution. And we will continue to spend in that area so it will be easy for our retail clients to manipulate the information we can give them. There should be as much information available to the clients as there is on a stock or a bond holding. That is one of the challenges that the fund of hedge funds industry has to meet: can they make the investments necessary to meet the information requirements of their increasingly demanding clients?”
Another challenge comes from the performance of other assets held by clients. “Stock markets around the world have been doing well.Property has been doing well, so there is a new performance pressure on hedge fund providers. It used to be the case that delivering the diversification characteristic to investors was a big element. But investors are too short term in looking at performance. As the comparison across the asset classes has become harder we think we have to deliver 10% plus returns to investors. That is our target level.”
An area that always attracts attention in the hedge fund industry is fees. John Morrison is clear about the dynamic he sees at play. “At the single manager level, in our stable or in the hedge fund industry generally we don’t see any deterioration in fees. For a quality management company, the better the manager the more competitive they can be with their own fees, provided returns are there. At the fund of funds level there is so much competition for institutional capital that one of the challenges for the industry is to hold the fee levels. At the same time there is an increasing requirement for robust processes at funds of funds and for enhanced transparency and client servicing. So as fees are coming down I think we will see more consolidation in the (fund of funds) industry. The founders of funds of funds companies have a lot to deal with in terms of succession planning and the governance of their companies. The uneven flows into funds of funds we have seen in the last few quarters have been putting more pressure on some of the players.”
From the distribution of sales it is easy to see that the territory where Man is doing least well relative to the market size is the Americas. Morrison readily acknowledges that North America has been a big challenge, compared with its successes in South America, and it remains a major strategic question. The initiatives taken to date by Man Investments have been about increasing the presence of its content providers in North America.
In 2000 it expanded its US operations when it bought Glenwood, the Chicago-based fund of funds manager and a long term partner of Man. Its latest initiative involves RMF, its Swiss-based institutional asset manager.
“RMF is in the process of beefing up their operation in the United States,” says Morrison, “so we can address the institutional market there. We are building an institutional sales team in the US, based in New York. On the retail side it has been very challenging for us in the United States, but not only for us. America is a complex market at the retail level for hedge funds. Maybe we didn’t start off with the right product there, but more recently the IP 220 product has started to gain some traction in terms of perceived performance. We do want to be there, and we have a quality product for them.”
Adds the CEO: “We have just announced the opening of a Canadian operation, Man Investments Canada Corp. We have had a presence in Canada, but we are now opening a full-blown office.” There will be six professionals deployed in Canada initially, one of whom will be based in British Colombia with the rest in Toronto. Man Investments is not new to Canada.
Man has had a strategic alliance with Canadian asset manager BluMont Capital Corporation for some years which has raised approximately C$500 million. Man Investments will continue what it describes as “a very important relationship” with BluMont Capital in servicing the many investors in the BluMont Man Note products, and indeed it launched the BluMont-Man IP 220 Series 4 Notes in July this year after the announcement of the new office. This is a typical challenge for Man as it grows its business in territories. Can it keep the existing partners and intermediaries happy if it beefs up its own direct sales force in a territory, or should it just offer more support to existing sales channels? Can clients be satisfactorily segregated when Man itself puts more resources to work locally and there is a local distributor?
“In the US there are a lot of moving parts. We have a strong presence for manager selection via MGS in New York, and Glenwood in Chicago. Finding new managers there, and attracting them to work with us requires a presence, a commitment to America, and people on the ground. Obviously this is something [a strategic acquisition in America] we have debated for some time [within the company]. We also know that Americans like brands: it is a very big comfort, for the institutions to know the name of who they are dealing with. For that reason we had considered buying a brand name for the institutional fund of funds market in the States. But in the end we decided against it because fundamentally I like growing businesses. As the growth continues and people’s working week gets longer it creates opportunities for others to come in.”
This facilitates part of the Man way of developing careers. It is quite typical for an executive to move territory and apply their experience in a new situation. Indeed it has happened to Morrison himself. Man Investments has clearly been successful at keeping and growing its sales staff: “Not one of our senior sales managers has been brought in at the level from the outside,” declares Morrison. This allows a continuity in the sales culture of the company, and Man recognises that time is required to build up to a flow of sales. “It takes two years to build a deep enough relationship with someone either for retail distribution or for an institutional sale. Our experience is that it takes the same for any territory.”
“Man’s challenges in the year ahead are familiar to the whole industry. They include how to increase institutional sales, how to achieve greater transparency, how to work more closely with regulators and how to find quality managers. The biggest challenge in this industry has always been finding quality managers, and getting capacity from those managers,” states Morrison. The funds under management split shown in Graphic 2 reflects the concentrated effort Man has to make to enlist newer, quality managers to contribute meaningfully to Man’s success. The 45 Affiliate Managers comprise eight strategic alliances (such as Bayswater), 32 capacity relationships and five others in early stages of sponsorship. The Affiliates include fixed income multi-strategy managers BlueCrest, and embrace a range of styles including managed futures, arbitrage, long/short equities and global macro. They are located in the US, the UK, Australia and Singapore. It has taken an enormous effort on the part of MGS (Man Global Strategies) to identify the managers – 300 managers are seen to yield a long list of 15 managers, and due diligence will halve that list, and the difficulty of agreeing a deal will cut that list down to three or four names. In addition RMF runs a program called RMF Ventures which takes equity stakes in new and emerging hedge fund managers. These are the programmes that are intended to find the next AHL or next BlueCrest for Man.
It is clear that the profitability, if not the sales, of Man Investments was very dependent on AHL last year. To a great extent this is a result of the tremendous success of AHL in generating highreturns. Over the period from December 1990 to the end of May this year AHL had produced an annualised return of 17.9% with an annualised volatility of 16.6%. The record in discrete multi-year periods is also excellent, so the track record of AHL is not based on one short period of very high return. This has enabled Man to sell structured product with AHL as a core over many years.
Glenwood, the US-based fund of funds, has typically been the leavening in the mix of structured product with AHL. Specifically the Glenwood fund of funds has had the role of diversifier in relation to the systematic CTA within the structured product. The track record of Glenwood used to very good (see Graphic 4), but in the period since 2000 returns levelled off.
This was a risk in several ways for Man as a group. It became difficult to justify the Glenwood portfolio within the structured product as the returns of the fund of funds were simply diluting those of AHL, and not adding sufficiently to other characteristics. For Glenwood itself there was rising commercial risk: some commentators have suggested that a majority of the assets managed by Glenwood came from the Group via structured product. The external perception was that Glenwood was dependent on the Group for new capital as the recent returns did not attract outside investors.
John Morrison reflects on the Glenwood conundrum: “Glenwood had clients in Asia and other territories that wanted specific sorts of [lower] risk profiles. They produced them for those clients, but the management of Glenwood also had gone into an area of safety in terms of the sorts of strategies they were prepared to invest in.” A firm hand has been taken. Man Investments identified that Glenwood had strong bottom-up selection of managers, and that a successful fund of funds looking forward had to produce higher returns than the industry had generally been delivering in the last five years. Glenwood has been given a clear mandate: returns above 10% p.a., with bond-like volatility. There have been substantial changes to both the key investment decision-makers at Glenwood and to the fund of funds. In the re-structuring process 65% of the portfolio was changed, and the number of managers within the portfolios have been reduced.
Glenwood has gone from under-performing the competition on a multi-year basis to beating most in the last year or so. External investors have spotted the pick-up in Glenwood’s performance – flows have been up at Glenwood in the first four months of the year. Glenwood’s role in the structured product (paired with AHL) has recently been taken by another Group content provider. In the last financial year BlueCrest was included in a guaranteed fund for the first time. This gives Man Investments the prospect of better diversification of product content in future.
Man Group has also been very successful in selling hedge fund product to private investors and quite successful in managing hedge funds on behalf of institutional investors. The consequence is that the split between the two client groups has a pronounced bias.
The increasing bias towards private clients is atypical in the hedge fund industry, as the growth of the industry has been increasingly driven by institutional flows. This split is one of the two great anomalies in Man Investments, the other being the significance of structured product to the business. Of course it is possible that Man could take further share in retail sales to find the requisite growth, but the tailwind in the industry comes from institutional flows. So institutional sales of $3.4bn in FY2006 were a disappointment after sales of $5.8bn in FY2005 and $3.7bn in FY2004.
An early success as CEO
John Morrison has achieved an early success in his tenure as CEO of Man Investments. In order to mark the maturation of the original Man IP 220 product (annualised return of 17.1% over the period Dec 1996to Nov 2005) he proposed a global launch of a successor product. This was a major effort, with the structuring of multiple product offerings through six onshore and offshore structures in five underlying currencies. Whilst there was some doubt that such complexities could be addressed in the short time available, Morrison pushed his team on to great effect – the $2.3bn of investor money raised with this product in the first quarter of this year made it the largest global private investor launch of a hedge fund product the industry has seen.
With the new Man IP 220 product John Morrison has already made a mark on Man Investments, and brought the parts of the business together to act cohesively with a unified purpose, even though they operate separately. This is an early example of what he is trying to do across the different business functions (content, structuring, and distribution as Man defines them). Morrison says himself that “coming in to the mainstream of Man Investments I found that the company already had a lot of efficiencies.” So he does not have to fix a company that is not working. Rather, he has made an effort to resource several initiatives from the centre that should give further coherence to Man Investments as a whole. This is crucial from a strategic perspective if Man Investments is going to continue to grow at the pace it has through organic growth. If Man is to avoid the necessity of buying capacity, specifically in America, then it needs to execute its current business scope even better than previously. The new financial year has started very well. Sales in the period since the March year-end were over $5 billion. Group funds under management have increased from $49.9 billion at the end of March, to over $54 billion at 30 June. Under its new leader Man Investments looks to be in safe hands.