POLAR CAPITAL HOLDINGS PLC 2008 Interim Results Mark Kary (CEO) - - PowerPoint PPT Presentation

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POLAR CAPITAL HOLDINGS PLC 2008 Interim Results Mark Kary (CEO) - - PowerPoint PPT Presentation

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POLAR CAPITAL HOLDINGS PLC 2008 Interim Results Mark Kary (CEO) John Mansell (COO) December 2008 POLAR CAPITAL HOLDINGS plc Table of Contents Section I Current state of the asset management industry. Overview of Polar Capital.

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POLAR CAPITAL HOLDINGS PLC

POLAR CAPITAL HOLDINGS plc

2008 Interim Results

Mark Kary (CEO) John Mansell (COO) December 2008

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Table of Contents

Section I

  • Current state of the asset management industry.
  • Overview of Polar Capital.
  • Polar’s competitive positioning.
  • Strategy for growth.
  • Other topics for discussion.

Section II

  • Financial Overview
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POLAR CAPITAL HOLDINGS plc

2 Source: Morgan Stanley Research – September 2 2008

Asset Management Barbell

Polarisation between ‘cheap’ and ‘alternatives/spicy’

Move to alternatives driven initially by modern portfolio theory – the efficient frontier, low correlation and superior risk adjusted returns.

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3 Growing Asset Class Data as at March 31st, 2008 $39 $58 $96 $168 $167 $186 $257 $368 $375 $456 $488 $536 $622 $817 $972 $1,105 $1,465 $1,868 $1,875 $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 $2,000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Q1 2008 Assets (in $ Billions)

Rapid Growth of Hedge Fund Industry

Leads to bubble

Source: Morgan Stanley Research – March 2008

300 hedge funds in the early 1990s; nearly 10,000 by 2008. In 2009: $1,000mm?

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Global Macro, 71.4% Equity Hedge, 6.2% Relative Value, 15.5% Event Driven, 6.9% Equity Hedge - 36.9% Global Macro - 15.5% Relative Value - 27.4% Event Driven - 19.7% Other - 0.6%

Hedge Funds by Style and Strategy in 1990 Hedge Funds by Style and Strategy in 2007

Source: Morgan Stanley Research – March 2008

Changing nature of hedge fund allocation

Lots of new strategies

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What has gone wrong?

  • No barriers to entry: Industry took off post 2001 bear market; too many entrants driven

by greed rather than desire to be “guardians of capital”.

  • Investors as well as hedge fund managers bear responsibility: Competition for

returns versus meeting client expectations; confusion between alpha and beta; and insufficient transparency. All lead to too much correlation and directionality.

  • Managers not up to the task: Too little regard for macro environment and for risk

management; no real ability to short stocks; too much leverage and focus on less liquid strategies.

  • Poor performance and redemptions: Hedge fund industry performance is down about

20% year to date. This has led to redemptions which across the industry could be around 30-40%. – Investor expectations not met. – Pre emptive redemptions and game theory. – Counterparty risk. – Deleveraging and shortage of cash.

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  • Economic outlook supportive of a cautious approach: a multi year deleveraging cycle

and the need for banks to rebuild capital suggests 2-5 years of negative and/or below trend growth. Risks of 1930s style depression still a possibility and volatility likely to remain high.

  • Risk adjusted performance: Despite 2008 industry performance hedge fund returns in

relative and risk adjusted terms are impressive versus a long only equity approach. Hedge fund industry performance should generate 7% real return over a cycle with less volatility and low correlation to equity markets.

  • Hedge fund industry matures: The hedge fund industry will mature, professionalise and

consolidate enormously. The events of 2007/8 will ensure a far more professional industry at all levels.

  • Absolute return allocations to increase: Demand for strategies focused on capital

preservation and absolute return will increase, driven by all investors, but especially retail and large institutions.

Absolute return is still a very valid diversification

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Risk/Return Characteristics Across Asset Classes

1990 – 2008

Risk and Return

Data from Jan 2000 to Jun 2008

Annualised Compound Annualised Standard Rate of Return Deviation Return/Volatility MSCI World Equity Index 4.88% 13.47% 0.36 JPM Global Government Bond Index 6.76% 3.20% 2.11 HFRI Fund of Funds 9.56% 5.54% 1.72

Correlations

Equities Bonds Hedge Funds Equities 1.00 Bonds 0.02 1.00 Hedge Funds 0.50 0.04 1.00

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4.4% 10.2% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% Average 02-06 2007 Hedge funds % of alt investments 7% 15% 26% 33% 32% 0% 5% 10% 15% 20% 25% 30% 35% 2003 2004 2005 2006 2007 % AUM Allocated

“Endowment Envy” has in part driven a massive shift to ‘alternatives’, particularly in private equity and increasingly in HFoF, and global equity and fixed income in US institutional

Source: Morgan Stanley Research – September 2 2008

Allocations to Alternatives strong… …within alternatives hedge FoF share increasing – although private equity has been dominant in US alternative flows

Hedge funds still underweighted in portfolio allocations of many investors

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Hedge Funds 58% Long Only 42%

European 13% UK 3% Japan 25% Technology 27% Global Opportunities 17% Emerging Markets 12% Macro 2% Healthcare 0% Utilities 1%

Hedge Funds 66% Long Only 34%

Overview of Polar Capital

Assets under management

European 18% UK 4% Japan 13% Technology 15% Global Opportunities 34% Emerging Markets 6% Macro 7% Healthcare 3%

AuM split by strategy (28 November 2008) AuM split by business unit (28 November 2008) AuM split by strategy (28 December 2007) AuM split by business unit (28 December 2007) At 28 December 2007, assets under management totalled $3.6bn split as follows: At 28 November 2008, assets under management totalled $2.5bn split as follows:

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$bn

AUM @ 31 March 2008 $3.14bn Gross inflows to 30 Nov 2008 0.73 Gross outflows to 30 Nov 2008 (excluding fund closures) (0.49) Net flows from ongoing business to 30 Nov 2008 0.24 Fund Closures (0.34) Performance Long Performance

  • 0.18

Hedge Performance 0.03 Net Performance (0.15) Currency gain/(loss) (0.36) AUM @ 30 Nov 2008* $2.53bn

*Note that the regular quarterly disclosure in mid January 2009 will document position for quarter ending December 2008.

Overview of Polar Capital

Unaudited AUM flows*

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$m Hedge Funds

UK ** 105 Nov 2001 3.27% 4.26% 6.10 MSCI Europe

  • 43.26%

European Forager 292 Aug 2003 11.85%

  • 13.97%

8.80 FTSE 100

  • 33.60%

European Conviction 174 Mar 2006 5.56% 8.21% 11.90 MSCI Emerging Markets

  • 56.71%

Paragon 875 Mar 2004 15.76% 17.93% 17.90 Tremont Long/Short

  • 19.46%

Discovery** 174 May 2006 14.36% 11.02% 6.40 Dow Jones World Technology

  • 47.11%

Elbrus 109 Apr 2006 36.08%

  • 50.95%

21.60 Tokyo Stock Price (TOPIX)

  • 32.06%

Latin America 22 May 2006 23.57% 3.74% 11.30

Long Only

Index Volatility

Technology Trust 339 Feb 2001 0.33%

  • 29.54%

Japan UCITS** 339 Oct 2001

  • 7.88%
  • 20.90%

Global Technology UCITS** 53 Oct 2001 3.36%

  • 47.51%

MSCI Europe 22.84 Healthcare Opportunities UCITS 66 Dec 2007 N/A

  • 27.01%

MSCI Europe Small Cap 32.96 MSCI EM Equity 44.09

  • Indicative figures to the 30 November 2008

** Fund size includes mandates run off the same strategy

Overview of Polar Capital

Performance

Fund Fund Size Launch Performance Performance Volatility Index Nov 30th 2008 Date Calendar 2007 YTD* YTD*

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Polar Funds vs Indices

40 50 60 70 80 90 100 110 120 130 140 3 / 4 / 2 7 3 / 5 / 2 7 3 / 6 / 2 7 3 / 7 / 2 7 3 / 8 / 2 7 3 / 9 / 2 7 3 / 1 / 2 7 3 / 1 1 / 2 7 3 / 1 2 / 2 7 3 / 1 / 2 8 2 9 / 2 / 2 8 3 / 3 / 2 8 3 / 4 / 2 8 3 / 5 / 2 8 3 / 6 / 2 8 3 / 7 / 2 8 3 / 8 / 2 8 3 / 9 / 2 8 3 / 1 / 2 8 Time Return (base 100) CSFB/Tremont MSCI World Polar Composite

Overview of Polar Capital

Performance

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  • Highly differentiated performance of funds.
  • Significant shrinkage in number of competing funds.
  • Incentivisation in place with funds at/near high water marks.
  • Distress at a time of significant opportunity.
  • Relative stability of the ‘fundamental research driven’ approach.
  • Integrity and low profile of the model.
  • Strong operating infrastructure positions the business well for changes in the operating

and regulatory environment.

Polar’s Competitive Positioning

As strong as it ever has been

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Barron’s First Ranking of the World’s Best Performance Hedge Funds Three year net performance (through June 30, 2007)

Source: Barron’s

Competitive Differentiation

Best performing hedge funds

Fund Assets (m) 3 yr cum. av. H1 07 2008 YTD 1 RAB Special Situations 2267 47,69 17,93

  • 67%

2 The Children’s Investment Fund 5000 44,27 15,72

  • 32%

3 Highland CDO Opportunity 463 43,98 14,53 CLOSED 4 BTR Global Opportunity, Class D 279 43,42 31,38 NA 5 SR Phoenicia 1200 43,10 20,50

  • 48%

6 Atticus European 8190 40,76 3,65

  • 40%

7 Gradient Europe Fund A 2200 39,18 8,33

  • 75%

8 Polar Capital Paragon Absolute Return 531 38,00 6,39 +21% 9 Paulson Enhanced Partners 2775 37,97 55,18 +29% 10 Firebird Global 733 37,18 17,11

  • 67%
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  • Focus on growth of existing funds.
  • Some limited and opportunistic recruitment.

Strategy for Growth

Plan for 2009

Paragon $1500mm Conviction $750mm Forager $500mm Discovery $1000mm UK UCITS3 $500mm Latam $250mm HEDGE TOTAL $4500mm Japan $600mm Technology $600mm Healthcare $300mm LONG ONLY TOTAL $1500mm TOTAL $6000mm Capacity and Growth Prospects

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  • How diverse is the investor base?
  • What are the current redemption pressures?
  • Will there be pressure on fees?
  • What will happen to fund liquidity terms?
  • How has Polar managed to deliver this performance?
  • Is the business too dependent on the Paragon Fund?
  • What is the feedback for investors and potential investors in our funds?

Any Other Business

Questions Raised

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Summary

  • We expect the global economic backdrop to continue to present a very challenging

environment.

  • Considerable damage has been done to the ‘reputation’ of the hedge fund industry.
  • Polar’s competitive positioning is strong.
  • Challenges will be to attract assets and boost core profitability.
  • This could be a very important inflection point.
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  • AUM

− AUM at 30 September 2008 down 9% to $2.87bn compared to $3.14bn at March 2008 (2007: $3.4bn). − Analysis of movements on AUM page.

  • Profitability

− Pre-tax profitability down 67% to £1.5m (Sept 2007: £4.5m). − Performance fee receipts historically weighted to second six months.

  • EPS and Dividend

− Basic undiluted EPS down to 0.59p (2007:3.93p) − Adjusted diluted EPS down to 1.25p (2007: 4.46p).

Adjustment excludes cost of share based payments

− First interim dividend per ordinary share of 1p declared, to be paid in January 2009 (2007: 1.5p).

  • Balance Sheet

− £19m of net cash and £15m of investments in own funds.

Financial Review

Highlights for 6 months to 30 September 2008

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Core operating profit 3.4 2.6 6.0 0.9 Performance fee profit 0.3 7.7 8.0

  • Interest and similar income

0.8 0.9 1.7 0.6 PBT pre IFRS S.B.P. 4.5 11.2 15.7 1.5 Share based payments (“S.B.P.”) (0.6) (0.6) (1.2) (0.5) Statutory PBT £3.9m £10.6m £14.5m £1.0m

2008 2009

1st Six 2nd Six 2008 1st Six Months Months Year Months

Financial Review

Profits

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Comments * Other Operating costs contain cost of £500,000 from the loss made from the Company’s investment into its closed Global Utilities fund. Salaries and bonuses 4.9 4.1 9.0 5.1 Core distributions 0.9 1.3 2.2 1.5 5.8 5.4 11.2 6.6 Performance fee interests 0.6 12.4 13.0

  • Total cash compensation cost

6.4 17.8 24.2 6.6 Other operating costs 3.4 4.1 7.5 4.0* Operating Costs before SBP 9.8 21.9 31.7 10.6 Cost of sales (trail) 1.1 0.8 1.9 0.4 Share based payments (“SBP”) 0.6 0.6 1.2 0.5 Total Costs £11.5m £23.3m £34.8m £11.5m

2008 2009

1st Six 2nd Six Year 1st Six Months Months Months

Financial Review

Costs

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Dividend Policy

  • First dividend of 1.0p (2007: 1.5p).
  • Dividend reflects:

(a) reduced profits (b) historically the first dividend has been the smaller dividend

Financial Review

Dividend

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Financial Review

Projection for 12 months to 31 March 2009

  • AUM

– short term redemption pressure – strength of dollar has ameliorated reduction in AUM.

  • Core AMC Profitability

– Reduced AUM squeezing core profitability – Approx $2bn threshold level of AUM

  • Performance Fee Profitability

– Performance fee payment dates weighted to second half of the year. – Net performance fee receipts to end of Nov 2008 are in excess of 50% higher than £3.9m of net receipts received over the same period in 2007. – Further performance fees to be earned to March 2009 but are subject to the delivery of performance.

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Polar Capital Disclaimer

This document does not constitute an offer to sell or an invitation to buy shares in Polar Capital Holdings plc

  • r any other invitation or inducement to engage in investment activities. Certain statements, beliefs and
  • pinions in this document are forward-looking, which reflect the Company's current expectations and

projections about future events. By their nature, forward-looking statements involve a number of risks, uncertainties and assumptions that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. Forward-looking statements contained in this document regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. The value of investments, and the income from them, may go down as well as up, and is not guaranteed. Past performance cannot be relied on as a guide to future performance. Exchange rate changes may cause the value of overseas investments or investments denominated in different currencies to rise and fall. The Company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should not place undue reliance on any forward-looking statements, which speak only as of the date of this document.