Hedge funds let Man beat bears

Hedge funds; BBA; BioFocus
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The Independent Online

The bear market has been bullish for Man Group. The asset manager runs hedge funds, suddenly popular as a means of making money from falling asset prices.

Once one of the UK's biggest private companies, the old ED&F Man has turned itself from a commodities broker into a sophisticated fund management firm banging on the door of the FTSE 100.

Hedge funds – once the preserve of rich gamblers – have come into their own as the internet bubble was pricked and short-selling or derivatives trading became the fastest means of making cash from equities. The funds offer exposure, too, to a balance of bonds and currencies. Man has seen a surge of interest from investors fed up with negative returns from their traditional brokers.

It is not just a bear market phenomenon, though, and it would be wrong to assume Man will fade as markets recover. The returns from hedge funds, while risky, can look more attractive than growth from equities or bonds in an era of low inflation and interest rates – particularly to a pension fund forced, because of an ageing membership, to put much of its money in low-risk bonds.

Man's exponential share price rise over the last five years means it is vulnerable to bouts of profit taking. That was the knee-jerk reaction yesterday to news that its fund management performance has been disappointing since the start of the new financial year. Its annual general meeting was told that performance fees are running 9 per cent below their March peaks thanks to an equity markets' rally in April, which caught its AHL fund management business short.

But most analysts prefer to concentrate on core profits, which strip out volatile performance fees, and these are rising in line with Man's assets under management. Fund values have jumped to £5.6bn from £4.7bn just three months ago. It has won the mandate to run part of the giant General Motors pension fund in the US, which is a handsome calling card ahead of its big push into the US institutional market.

On a forward price-earnings ratio of 20, Man, down 45p to 924.5p, looks cheap compared with more traditional fund managers, such as Schroders, where performance and mandate wins have been poor. Still a buy.

BBA

BBA, the airport services and materials technology company, has proved a dire investment in the past year. The share price has more than halved from a 502p peak in September and underperformed the stock market by 40 per cent.

The fall follows worsening trading conditions but also reflects investor unease following the departure 10 months ago of Roberto Quarta after seven years as chief executive. He is credited with turning BBA into a company with two focused divisions from a sprawling, unloved conglomerate.

More recently some shareholders have been upset that BBA used non-public meetings with analysts to persuade them to massage down their profit forecasts rather than making a statement to the market.

BBA's key concern is the performance of the materials technology business, which makes non-woven materials for hygiene and industrial applications. The division has been hit by higher raw material prices and destocking by some customers in the US. Roy McGlone, the new chief executive, admitted yesterday that "the trough [at materials technology] has been a bit deeper than we had been expecting".

The big question for BBA is whether to keep the materials business or spin it off. BBA expanded its higher-growth airport services business further yesterday with the $137.9m (£98.5m) acquisition of Aircraft Service International Group.

Analysts believe BBA could get up to £750m for the materials operation, which could be ploughed back into airport services or returned to shareholders. Rumours abound that BBA will dispose of the division soon but Mr McGlone insists he has no formal plan to sell.

The shares, up 1p to 249p yesterday, trade on a prospective p/e of 11. That's high enough given BBA's difficult trading conditions.

BioFocus

Risk-takers may spot a buying opportunity in BioFocus, the AIM-listed science company. The firm helps pharmaceutical and biotech companies search for new drugs, using its screening technology and library of chemical compounds.

Its £27.5m acquisition in May of Cambridge Drug Discovery entailed the issue of shares equivalent to a third of its market value, and selling since then has knocked 40 per cent off BioFocus stock. But the worth of the CDD's technology was shown in yesterday's news of a joint venture with Australian Cancer Technologies, which is seeking a breast cancer cure.

Up 5p yesterday to 345p, the shares are now on five times the coming year's sales – a big discount to its Nasdaq-listed peers. Buy.

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