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Viva volatility, Man

Hedge fund fees are volatile so a volatile dividend policy – that could go up, down or sideways in any given year – makes sense

Most dividend-paying companies aspire to have a progressive dividend policy, meaning an annual payment to shareholders that goes up every year.

That’s why, when they cut a dividend, bosses often use the cheesy euphemism “rebased” to describe the new level: they are trying to gain some credit for setting a new floor from which dividends can rise.

But here’s something novel. Say hello to the volatile dividend policy – a distribution that could go up, down or sideways in any given year.

Naturally, Man Group didn’t use the word “volatile”, it prefers “revised”. If you suspect that’s another euphemism for a cut, you may turn out to be correct. But not necessarily.

Here’s how it works. From next year, Man’s shareholders will get “at least 100% of adjusted management fee earnings per share”. In other words, all Man’s basic earnings – the fees collected automatically from managing funds, minus the cost of doing business – will be passed to shareholders.

Those fees are currently running at about 12 cents a share. So, yes, a big cut from the current dividend level of 22 cents could be in the offing. Much depends on the level of assets under management, which declined from .1bn (£43.3bn) to .4bn between March and December last year. The slide has been halted since new year – bn has been added – but it’s early days.

But the new dividend policy only describes a formula for a minimum payment. What if Man’s funds actually start to perform better? What if performance-related fees, which slumped last year, return? In that case, a decent slice of those performance fees will also be directed to the shareholders. Indeed, Man has about 0m of excess capital to tap if it wishes.

So, if you’re optimistic about the chances of Man’s funds returning to form (especially the huge AHL black-box trend-following system) and attracting inflows again, there’s an interesting bet here for an income investor. In 2012, the management says you’ll still get a 22-cent dividend, equating to a 10% yield. When the new policy kicks in next year, you should get a 5%-ish yield if Man merely stabilises its business – but you might get more if management achieves a recovery.

It’s a gamble on a company whose business model looks substantially less stable than in the past. But the market seems to like the terms – Man’s shares rose 12% – and one can understand why. Hedge funds’ fees are volatile, so a volatile dividend policy makes sense. It is certainly more logical than pledging to pay a dividend that is not covered by earnings.

Of course, it is also a mighty come-down from Man’s pre-2008 glory days, when the progressive policy progressed as far as 44 cents a share. But, as a way of distributing more meagre and unpredictable rations, the new thinking looks friendly to shareholders. Viva volatility.

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