Reduced financial leverage and increased cost
In the current market environment there is a risk of a reduced appetite of financial counterparties to provide financing to support the leverage in fund products. Reduced availability of or increased cost of external financing could reduce the returns on certain fund products. It could also increase the potential demand for Man to provide funding to these fund products.
At the year-end drawn external finance leverage was $2.6 billion, with a further $1.2 billion available.
To mitigate this risk we facilitate a process whereby the fund products borrow directly on a basis that is recourse only to the assets of the fund product and on defined maturity terms. The financing is provided by a wide group of large financial institutions many of whom also distribute the products and hold the principal guarantees. The financing process is managed so that maturity dates of the financings are staggered. These fund products are designed to operate within defined liquidity parameters so that external financing is provided to the products on a dynamic basis. If the fund product were to incur a significant performance loss the fund would be systematically de-leveraged to preserve the investors' capital which is subordinate to the financial counterparties' lending.
The cost of financing is included in the performance of the funds, if this cost increases, investment managers may have to reduce leverage or seek alternative trading strategies. In addition, we can issue many of the structured products in an open-ended, unleveraged format if required. The use of managed accounts by our investment managers assists in the rational optimisation of funding within the fund product. In addition, our strategy of combining managed futures (which trade on margin) with other investment styles allows for the efficient provision of leverage into the products.
These strategies mitigate the effects of short and medium-term decreases in financing appetite and the impact on performance of the cost of leverage.
Fiscal changes
The fiscal treatment of alternative investment products varies by jurisdiction. In certain jurisdictions the current fiscal treatment of the products does not make them attractive for private investors when compared to traditional investment products. As a general trend we continue to see the tax authorities in certain jurisdictions moving towards treating alternative investment products on the same fiscal basis as traditional investment products. This trend is favourable to our business, however it is possible that it could reverse and negatively impact the growth of our business.
As a global leader in investment management we develop products to meet the specific requirements of investors in different regulatory and fiscal jurisdictions. Our structuring, compliance and legal teams are located in the major regions to ensure that our products are continuously compliant. As a result we have a range of on-shore and off-shore products suited to meet the fiscal and investment needs of our private investors. The breadth of our products and global spread of our investors and our worldwide distribution capability mitigates the financial effect that a negative change in any particular jurisdiction might have.
Loss of key individuals
Our people are a key asset. There is a risk that key individuals leave the business resulting in a loss of knowledge or expertise. To enable our people to understand their career potential we have an active performance management and succession planning process in place. We have a strong employer brand which means that when we have to recruit from outside the Group, our leadership position within the industry makes us a preferred employer.
Attracting the best talent, motivating them to excel, retaining them and ensuring that they progress in their careers is fundamental to the sustainability of our business and our leadership position.
The size and scale of our distribution network, the span of our investment management capacity and the breadth of our product range reduce our reliance on any key individuals to generate performance. Our management has significant expertise in each of their respective areas. They also understand, as a cultural imperative, the need to identify and advance the next generation of leaders through succession planning and mobility. Many of our investment managers have a history of success over a 20 year period each driven by successive strong leadership.
