M&G’s split from Prudential last October was supposed to enable the asset manager to chart a bold new course, free from the constraints of the sprawling insurance group’s ownership.
But rather than finding the freedom to expand into new markets and make significant acquisitions, the investment company has struggled through a year of tumult, hit by a liquidity crunch at its property fund and an acceleration of retail investor outflows sparked by the coronavirus pandemic.
“M&G has had a first year to forget,” said Amin Rajan, chief executive of consultancy Create-Research, which advises some of the UK’s largest asset managers. “Its plans have been hobbled by the perfect storm of Covid-19 forcing it into firefighting mode and active asset managers’ impotence against passive funds.”
Like City of London rivals, including Standard Life Aberdeen, Schroders and Invesco, M&G is a victim of the seismic shifts affecting the active asset management industry. Fuelled by stockpickers’ dismal performance, the implosion of the once-lauded fund manager Neil Woodford and a growing awareness of the fees active funds charge, investors have been ploughing more money into low-cost tracker funds offered by BlackRock, Vanguard and others.
But M&G also faces individual challenges. As an asset manager, it is best known for its retail franchise, including several former blockbuster funds that are now haemorrhaging assets.
The reversal in the fortunes of its Recovery fund, one of the UK’s oldest, is one of the clearest examples. The fund’s assets have shrunk from £8bn in 2012 to £1.4bn and its longstanding manager, Tom Dobell, who had been lauded for achieving stellar returns by betting on value stocks, is leaving the company after years of poor performance.
Meanwhile, M&G’s institutional investment business is less renowned and lacks the clout to offset the retail outflows.
The FTSE 100 asset manager’s share price has dropped by almost a third from the demerger price, compared with an 18 per cent fall for the index overall.
Analysts expected shares in M&G to be volatile initially as Prudential investors weighed whether to keep the stock. But M&G’s shares lost more than 60 per cent between mid-February and mid-March as the coronavirus pandemic took hold in the UK, a far greater drop than the 44 per cent and 24 per cent falls registered by Standard Life Aberdeen and Schroders.
“This is not the backdrop we would have wished as a newly independent company,” chief executive John Foley remarked as M&G reported a fall in pre-tax profit last month.
Barclays analyst Thomas Howarth, who downgraded the stock to an underweight rating in July, was more blunt. “It is hard to identify anything that has gone well for M&G since the demerger.”
The first stumbling block for M&G was the suspension of trading in its £2.5bn property fund last December, after investors rushed to withdraw their cash because of Brexit fears and the fund’s large exposure to the hard-hit retail sector. Rival property funds halted trading a few months later, as economic activity worsened and it became harder to value real estate due to the pandemic.
M&G has waived 30 per cent of ongoing charges paid by investors since the fund’s suspension. But Ryan Hughes, head of active portfolios at AJ Bell, said the move had damaged M&G’s reputation. “For many investors who are trapped in the fund, the event will live long in their memory and be forever associated with M&G.”
M&G’s wider retail fund range was then hit by mounting investor outflows, particularly from flagship vehicles such as the £16.5bn Optimal Income fund.
That product, which until last year ranked as the UK’s largest retail fund, has suffered poor performance in recent years and accounted for £4.3bn of the £7.7bn of net outflows from M&G’s retail asset management arm in the first half, according to RBC Capital Markets.
Although M&G’s institutional asset management business and PruFund, the popular with-profits strategy that is designed to smooth out volatility, are registering positive flows, the weakness of the higher-margin retail fund business is a concern for shareholders.
“A shrinking asset management business is not conducive to profitability. Outflows from more lucrative retail products are an issue for M&G and certain strategies need to remedy performance,” said Charles Bendit, analyst at Redburn.
Just 15 per cent of M&G’s fund range have beaten the market over a five-year period, rising to 20 per cent over three years, according to analysis by Morningstar comparing the funds to their category-level benchmarks.
Mr Foley plans to tackle the performance issues, saying the company will examine all of its funds to make sure they are still appropriate for clients and look at fees.
M&G is also shifting its focus away from individual portfolio managers, such as Optimal Income’s Richard Woolnough, who once ranked among Europe’s top-earning managers, to teams, in an attempt to improve returns. “Traditionally asset managers tend to rely on the individual fund manager, but we think it is beneficial to have a more team-based approach where managers can rely on others to develop ideas and do analysis,” Mr Foley told the Financial Times.
Mr Hughes said M&G must take tough decisions and trim down its bloated fund range by focusing on its core asset classes. This is the only way the group can differentiate itself from the passive managers or more specialised stockpicking boutiques, he said.
For now, M&G hopes shareholders will be comforted by the fact that the asset management business sits alongside a large insurance book, which generates steady earnings as it is run off, protecting profits and helping the group meet its dividend commitments.
“M&G’s internal [insurance] assets under management provide a bedrock on which to address these issues without having to worry excessively about the current pace of outflows,” said Mr Bendit.
RBC estimated that the company’s insurance business would release £78m in mortality reserves every year over the next five years.
In May, M&G committed to paying its maiden dividend in full, a move that helped the shares recover some lost ground.
Some green shoots are also appearing. M&G is pushing ahead with the continental European rollout of its with-profits PruFund range after signing distribution agreements with two banks.
One top 20 shareholder has high hopes for PruFund’s expansion. The investor said the market opportunity for the product was large and the European version could boost M&G’s earnings if it adopted an annual management fee charging structure. That would differ from the UK product, which collects fees as investors exit.
M&G is also looking to grow in the US and Asia. It recently opened an office in Chicago and took back some Asian assets that had previously been managed on its behalf.
Shorter term, analysts believe M&G’s integration of Ascentric, the adviser platform acquired from Royal London, could have a bigger impact by helping it to consolidate its position in the UK adviser market, where it already has a strong presence.
But the steps taken by M&G so far are small. “To fix its problems, it needs to have materially higher institutional inflows and materially lower retail outflows, then the balance might change,” said ShoreCap’s Alan Devlin. “At the minute there is no sign of that happening.”