M&G faces testing split from the Pru

M&G Investments, famed for launching the first ever UK unit trust back in 1931, breaks away from insurer Prudential on October 21 in a listing that promises a rapid ascension into the FTSE 100.

The demerger, which sees shareholders receive one new M&G share for each Prudential share they already own, will create an insurance and asset management powerhouse that analysts predict will command a market value of between £7bn and £9bn.

With £341bn in assets under management, M&G will be the UK’s third-biggest listed fund group, behind Standard Life Aberdeen (£577bn) and Schroders (£444bn). 

The split from Prudential marks a turning point that provides M&G with scope to reinvent itself and fix problems that have dogged it for years.

As a pure active manager, M&G has been hit by investor apathy towards traditional stockpicking funds and relentless fee pressure. Industry watchers say an ambitious strategy is needed to help it withstand the onslaught from passive funds.

John Foley, M&G chief executive, promises a business that will be bold and ambitious. “Personally, I am incredibly excited by the demerger,” Mr Foley told analysts enthusiastically at M&G’s pre-listing presentation last month. “Customers, colleagues and, above all, shareholders should benefit enormously from this.”

A senior consultant working in the asset management industry adds: “M&G punched below its weight in the old structure. As a standalone business, it will be less constrained by the bureaucracy of the parent.”

Insiders say longstanding divisions between different parts of the asset management business have limited M&G’s growth potential, as have successive restructuring exercises instigated by Prudential. Over the past five years, M&G has been led by three chief executives: Michael McLintock, Anne Richards and John Foley. Rather than achieving success, the rejigs and management churn have unsettled investors and eaten away at staff morale.

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The integration of Prudential’s UK insurance business into M&G two years ago has done little to quell the disquiet. In particular, moves by former Prudential executive Mr Foley, such as the appointment of a new chief investment officer from the insurance unit, have fuelled concerns that M&G’s top ranks are losing out. 

M&G has also failed to fix mediocre performance in some of its flagship strategies. When it was bought by Prudential in 1999, it was highly respected for its equity expertise, especially its Recovery fund, which launched in 1969. But that fund has turned into one of its biggest underperformers, lagging behind its benchmark for over 10 years and shrinking from £8bn in assets in 2012 to £2bn today.

The reputation of M&G’s fixed income arm has also been hit by the recent underperformance of the Optimal Income fund, once the UK’s largest retail fund. The strategy, managed by Richard Woolnough, one of Europe’s highest-earning investment managers, dropped 3.3 per cent last year, compared with a 2.5 per cent fall for the Investment Association’s strategic bond sector, its comparative peer group.

Investors have fled both the Recovery and Optimal Income funds, causing M&G’s retail asset management business to lose a net £3.8bn in the first half of 2019 alone.

The challenges facing M&G’s retail fund business are significant, says Mr Foley, noting that investor confidence has been harmed by Brexit and global trade tensions. But he is confident the volatility in revenues from the asset management side can be offset by more stable earnings from M&G’s insurance business.

He adds that having the insurance arm will enhance M&G’s product development capabilities, in particular the continued success of PruFund, its flagship with-profits fund that reached £50bn on the back of strong investor demand in recent years.

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The hope is that the large pool of assets held by PruFund will in turn benefit the asset management business, helping it to seed new funds and develop fresh strategies.

“As an asset owner we are well-placed to understand the needs of our clients and many of our third-party clients like the fact we have skin in the game,” says Mr Foley. “We can create value for both customers and shareholders in a way that is not possible if an asset manager and asset owner are kept apart.”

Yet analysts note that several factors outside of M&G’s control could mute investor appetite for the shares. The date it has chosen for its listing is October 21 — 10 days before the UK is due to leave the EU, possibly in a chaotic no-deal scenario.

M&G is not raising new capital through its listing but analysts say uncertainty could weigh on its share price. “[Brexit] does represent a challenge to M&G’s valuation given significant investor caution toward investing in UK stocks currently,” says Colm Kelly, an equity analyst at UBS.

In addition, M&G’s prospects may be curtailed by servicing the £3.2bn debt being transferred by Prudential.

There are also questions about the viability of M&G’s reliance on insurance for stable earnings, given about 40 per cent of the combined business is a large closed book of old policies. “[The question] is can M&G grow its open products faster than the closed book runs off,” says Paul De’Ath, an analyst at ShoreCap.

Despite the headwinds hitting M&G’s asset management business, observers say the company has long-term potential in the strength of its brand and investment expertise.

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Ryan Hughes, head of active portfolios at investment platform AJ Bell, says that M&G’s listing is an opportunity for the company to slim down its fund range and focus on the products where it has an edge. In its investor presentation last month, the company pledged to continue building out its private assets business and said it would strengthen its offering in public assets in regions important to its clients.

Analysts also point to M&G’s international prospects. The split from Prudential allows M&G to target for the first time markets such as the US and Asia; under the Prudential group structure, these markets were the preserves of subsidiaries Jackson National Life and Eastspring Investments.

Philip Kett, analyst at Jefferies, says M&G’s international growth could follow the example set by its rapid expansion into continental Europe. M&G was one of the first UK asset managers to build a European retail empire. The business is now 20 per cent larger than its UK business, with £37bn in assets, despite its market entry in 2001. According to Broadridge’s Fund Buyer Focus, the group is the fifth best-known fund management brand in Europe.

Although investor demand could be muted in the short term, Mr Foley is confident that economic and social forces will favour the development of M&G’s business in the long run. “Ageing societies, the widening savings gap and the vast amounts of money sitting idle in cash: it is enough to say that the wind is at our back.”



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