Man Group plc Annual Report and Accounts 2009

Kevin Hayes, Robert Aitken, Stephen Ross (standing)

The principal risks are described below

In addition to the principal risks discussed below, Man is exposed to other risks including:

Risk of reduced investor appetite for the risk/return and diversification profile of alternative investment products, which could result in lower sales and higher redemptions for Man's products.
Risk that poor fund performance and competitive pressure results in lower fees on our products. This risk may be higher in market conditions where absolute returns are lower and a given level of fees may absorb a higher proportion of the gross return.
Risk that fiscal changes either make alternative investment products less attractive for private investors when compared with traditional investment products or increase the long-term effective corporate tax rate.
Risk that as AHL's funds under management increase and as its investment exposure increases across the numerous instruments and markets in which it trades that it will be unable to sustain the returns that it has achieved historically. Despite an increase in AHL funds under management to over $20 billion, there is no evidence that this has yet happened.
Risk of credit losses on loans to funds, exposures to bank and broker counterparties or in respect of trade credit insurance, reinsurance and retrocession policies written by its subsidiary Empyrean Re.
Risk that income is reduced because of the impact of adverse movements on foreign exchange rates to the mismatch between non-dollar denominated costs and revenues.
Risk that the Group's performance is adversely affected by the departure of key people.

Further information on Man's risk profile is contained in Note 9 to the financial statements.

Nature of risk	Quantification	Mitigation
Under-performance of fund products Under-performance of our fund products compared with other investment products or with investor expectations could lead to lower sales and higher redemptions, thereby reducing funds under management and fee income.	KPIs of excess/shortfall of returns of fund products over benchmarks Find More...	Wide range of investment products with different risk and return characteristics. 35% of Man's funds under management comprise principal guaranteed products, which give the investor confidence to stay invested long-term and to withstand short-term market volatility.
Negative fund performance reduces or could even eliminate performance fees and reduces management fees.	Currently, all our core investment managers are some way below performance fee high water marks and therefore it is unlikely that significant performance fee income will be earned in the 2009/10 financial year.	In most financial years, the diversity of product range reduces the likelihood of all products being in drawdown at the same time. If a simultaneous drawdown does occur, the magnitutde and recovery time between styles results in a lower risk of a prolonged drawdown period.
Availability of external leverage In the current market environment there is reduced appetite of financial counterparties to provide financing to support the leverage in fund products. Reduced availability of, or increased cost of, external leverage could reduce the returns on certain fund products. Negative fund performance and/or increased volatility in fund performance can reduce the amount of external leverage available to certain fund products.	At the year-end drawn finance leverage was $4.7 billion, with a further $1.9 billion available.	Funds have facilities with 15 banks, with various maturity dates. The fund products can reduce their use of external leverage or seek alternative trading strategies. Man is not committed to replace external financing, but has discretion to bridge financing to a fund. The amount of funding is subject to strict risk limits.
Fund product financing The liquidity terms offered by certain of our fund products to investors in those products are better than the liquidity terms available to those fund products from their underlying investments. In the event of redemptions by investors in the fund products, the fund may need access to a bridging facility until the proceeds from the sale of underlying investments are received. If bridging is not available from an external bank, the fund may request Man to provide the necessary short-term bridging. The potential for, and size of, the liquidity gap increases to the extent that the managers of third party funds, in which our fund products have invested, impose gates or suspend redemptions.	The provision of funding for this purpose by Man is discretionary except where Committed Purchase Agreements (CPAs) are provided to certain fund products. CPAs to all products amounted to $1.0 billion at 31 March 2009 (2008: $2.7 billion). Man's unutilised liquidity buffer of cash and undrawn committed facilities was $4.8 billion at 31 March 2009, and did not fall below $3.1 billion during the year.	The amount of aggregate lending by Man is subject to strict limits to ensure that any lending is within our liquidity risk appetite. Use of managed accounts significantly reduces the risk of our fund products being exposed to liquidity restrictions by external managers. Man has substantial excess liquidity to enable it to meet the committed liquidity provision to its fund products.

Previous Next