Man Group plc - Interim Report 2007

Gross performance fees included within revenue, increased by 9% to $293 million for the six months ended 30 September 2007, compared with $269 million for the same period last year. Other performance fee income is included in other net operating income, relating to net gains from proprietary trading investments, and in the associates and JVs line, relating to our share of BlueCrest’s performance fees. AHL contributed 68% of the performance fees with 32% from all other Core Investment Managers.

Sales commissions relate to the upfront commission (FEL) and trail paid to distributors of our private investor products. For the six months ended 30 September 2007, sales commissions were $187 million compared with $162 million for the first half of last year. This increase is in line with the growth of private investor funds under management. Included in sales commissions is $70 million from the amortisation of the intangible upfront commissions, compared to $63 million in the comparable period and $129 million in the previous full year.

Administrative expenses have increased by 29% to $378 million, compared with $292 million for the same period last year. The majority of the increase relates to discretionary employee bonus compensation, which increased to $183 million from $131 million for the comparative period.

Net finance income for the six months was $53 million reflecting interest income from the MF Global IPO proceeds and other cash balances, partly offset by interest expense on debt to finance acquisitions and working capital requirements.

We operate in a competitive environment and therefore are subject to market dynamics which could lead to a reduction in historical profit margins. Our business model offers us significant flexibility to mitigate the effects of this risk. Our constant focus on top quartile performance enables our products to perform and enjoy continued demand and the size and scale of our business allows us to create operational efficiencies. Our distribution network is a variable cost linked to sales volumes, and a significant portion of our cost base is represented by discretionary bonus compensation which is variable with performance. These factors help us to preserve our profit margins.

Income statement
The income statement in the table below is for the Group’s continuing operations, relating to Asset Management. It therefore excludes the results of Brokerage, disposed of in July 2007, and the related profit on disposal.

Asset Management – continuing operations
Half year to 30 September 2007	H1 2008 $m	H1 2007 $m
Revenue	1,258	1,115
Sales commissions	(187)	(162)
Other net operating income	17	–
Total operating income	1,088	953
Administrative expenses	(378)	(292)
Operating profit	710	661
Associates and JVs	57	24
Net finance income/(expense)	53	(6)
Profit before tax	820	679
Taxation	(148)	(99)
Profit for the period	672	580
Pre-tax margin (Profit before tax/Revenue)	65%	61%

Discontinued operations – Brokerage
The results of our brokerage business, which are classified as discontinued operations in this Interim Report, are given in note 5 to the interim financial statements. The Group’s 18.6% residual holding in MF Global is being designated as an available for sale asset on the Group balance sheet at fair value, with changes in fair value being taken to the available for sale reserve within equity. The fair value of our residual holding was $645 million at 30 September 2007, reflecting an unrealised gain of $432 million, which is included in the available for sale reserve.

Revenue margins
One of our key performance indicators is net management fee margin. This represents the management fee income earned from the funds under management and interest on loans to funds, and compensates us for the distribution, operation and administration services, which we provide to the funds. To add clarity to the analysis of the net management fee margins we have restated our analysis by excluding net finance income/(expense), which principally relates to interest income earned on free cash deposits less finance costs on the Group’s debt. We believe that the restated net margin analysis gives a clearer indication of net margins from our ongoing investment management franchise.

The net management fee margin for private investors was 215bp, compared to 235bp in the prior year. The primary reason for the reduction in the net margin is lower interest income and liquidity fees earned in relation to the fund products. We have systematically reduced the amount of funding by Man directly to the fund products and increased the third party funding of the products. This strategy has placed the financing of the fund products with bank counterparties who provide this capital as part of their ordinary business. Consequently we have reduced our exposure to the funds and increased flexibility and scalability. In addition, the increase in administrative expenses, primarily relating to the strengthening of Sterling against the US dollar, and expenses incurred in relation to investment in new sources of returns have resulted in a further decrease in the margin.

The net management fee margin for institutional investors was 53bp, compared with 62bp in the prior year. The decrease in net management fee margin is primarily a result of a negotiated switch from management fee income to performance fee income. This is consistent with the industry trends in the institutional markets. The underlying fund of funds product is diversified and therefore the performance fees are more stable cross cycle.

Revenue margins	H1 2008	2007	2006	2005
Average FUM in period ($bn)	66.4	57.2	44.7	40.2
Net management fee income ($m)	537	943	704	601
Less: net finance (income)/expense ($m)	(53)	(10)	11	43
Adjusted net management fee income ($m)	484	933	715	644
Adjusted management fees/FUM	1.46%	1.63%	1.60%	1.60%

Taxation
The tax charge for the period on continuing operations amounted to $148 million. The effective tax rate is 18.0%, compared to 14.7% for the prior year, reflecting the estimated rate for the full year. The majority of the Group’s profit continues to be earned in Switzerland and the UK and the current effective tax rate is consistent with this profit mix. The increase in the rate from the prior year principally relates to the release of tax accruals last year as a result of reaching agreements with the UK and Swiss tax authorities on a number of outstanding issues.

Financial objectives
Our strategy focuses on delivering long-term, sustainable value to our shareholders. The key financial objectives that drive this value are growth in diluted earnings per share and return on equity. Earnings per share is a measure that encapsulates the primary drivers of financial performance for the Group. The earnings metric includes the measure of revenue that results from growing funds under management and the performance fee income from the investment performance of the funds. The maintenance of pre-tax margins as we grow demonstrates our control over our expense base. The denominator of average shares outstanding reflects our policy of share repurchases and cancellation. Return on equity is the measure to enable us to assess whether we are utilising shareholders’ equity efficiently and ensuring that adequate return hurdles are being achieved on invested funds.

Earnings per share
Diluted earnings per share on continuing operations for the six months ended 30 September 2007 increased 17% to 34.1 cents, compared to 29.2 cents for the same period last year and 55.4 cents for the full year.

As part of the Company’s distribution policy shares are repurchased and cancelled using excess reserves. During the first half of the year 45,860,018 shares were repurchased and cancelled at a total cost of $520 million. This was earnings enhancing, resulting in a 0.3% accretion to diluted earnings per share.

Return on equity
The Group’s post-tax return on equity for Asset Management, on an annualised basis, for the first half was 33.1%. This measure excludes the earnings and the profit on sale of MF Global, and the equity base excludes the proceeds from the sale and the residual investment in MF Global.

Distribution policy
The Group’s stated objective is to maximise shareholder value. Shareholders’ equity is therefore either utilised in the business to continue to grow the franchise or returned to shareholders. The Group has a consistent track record of distributing significant amounts of shareholders’ equity to shareholders. The ordinary dividend has been increased each year, in line with the growth of underlying earnings and has increased by a compound average growth rate, in dollar terms, of 35% per annum over the last five years. The Group has also repurchased shares for cancellation in each of the last six years and in aggregate has returned $1.3 billion of shareholders’ equity. The distribution of the IPO proceeds from the sale of MF Global will have the effect of distributing the net gain from the sale of $1.7 billion and in addition $1.1 billion of shareholders’ equity to shareholders. In 2007, subject to shareholder approval of the IPO distribution, distributions to shareholders aggregate to 15% of the current market capitalisation of the Group.

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