Oh, Man -- We're Out of the FTSE 100!

LONDON -- Today is a sad day for the directors and owners of listed hedge fund manager Man Group (OTC: MNGPY), which was expelled from the blue-chip FTSE 100 (INDEX: ^FTSE) index of elite British companies.

Demotion to the FTSE 250
Four times a year, the FTSE indices are reshuffled, with companies moving into and out of the FTSE 100, FTSE 250, and FTSE All-Share indices based on whether their market values have risen or fallen.

The biggest winners are those that join Britain's corporate heavyweights by climbing into the FTSE 100. This promotion, which is akin to being called up to football's Premier League, also means that FTSE 100 tracker funds must buy into the promoted firms, which can help push up their share prices.

Unfortunately, Man's crashing share price has seen it ejected from the Footsie to be replaced by defense contractor Babcock International, which moves up from the mid-cap FTSE 250 index. Even more embarrassingly, Man was the only casualty of the latest FTSE 100 reshuffle, so it's red faces all around at its head office in the City of London.

Ups and downs
In order to keep the FTSE indexes relatively stable, mid-cap companies are automatically promoted to the FTSE 100 at the quarterly index reviews only if their market values rank them inside the top 90 places. Likewise, firms are demoted from the blue-chip index when ranked below 110th (or when they have the lowest FTSE 100 market value) when FTSE 250 firms are automatically promoted.

Since the previous index review in March, Man's shares have almost halved. At 81.2 pence per share, Man's market value is below 1.5 billion pounds, which just isn't enough to keep it in London's top 100. According to Thomson Reuters data, Man was in 156th place in the FTSE rankings, while Babcock was 83rd, so they will swap places on June 18.

Man and the markets
Right now, Man's biggest problem is that its profits are being hammered by volatile and falling markets.

Man's trend-following, futures-driven strategies -- such as those employed by its flagship AHL fund -- seem to do best in stable or rising markets. Alas, with the FTSE 100 down nearly 6% in the past three months, Man is moving further and further away from the high-water marks its funds need to exceed to start earning juicy performance fees once more. What's more, in response to eurozone turmoil, Man's clients have been withdrawing money from its various funds. Thus, this double whammy of fund withdrawals and poor returns could well blow a big hole in Man's next set of profits.

The comeback Man
Even so, I have a sneaking suspicion that Man will return to the FTSE 100 and enjoy more days in the sun. All it needs is a couple of good quarters, and its shares could surge, propelling its market value past the 2 billion pound mark once again.

Right now, Man shares trade on a modest forward price-to-earnings ratio of less than 11 and offer a whopping prospective dividend yield of 18.3%, though it's covered a mere 0.5 times. Despite its net cash of $250 million, I can't imagine that Man will pay such a large, uncovered dividend. Nevertheless, even if Man halves its dividend to preserve cash, it would still offer a dividend yield above 9%. Hence, I am patiently watching Man, waiting to pull the trigger and buy when my desire for its delicious dividend outweighs my fear of yet more falls in financial markets!

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