M&G faces Prexit challenge
FUND manager M&G could hardly have picked a trickier time to spin off from its parent company, the Prudential.
It is making its debut on the stock market today as an independent entity, in the thick of Brexit uncertainty, not to mention the pall cast by the neil Woodford scandal which threatens to taint the whole industry.
Investors, including several thousand small private shareholders, will receive one new M&G share for each one they own in the Pru.
The split is happening because Prudential wants to concentrate on its rapidly-growing Asian business and its operations in the united States.
Once Prexit (sorry) has taken place, M&G will be a FTSE 100 business in its own right with a market value of £6bn to £8.5bn.
It will have just over £340bn of investors’ assets under its care, making it the third-biggest listed fund manager in the UK behind Standard Life Aberdeen and Schroders.
That makes it a major player – a role which brings with it serious responsibilities. Small shareholders will no doubt be attracted by its potential as a solid dividend payer.
The plan is to hand out £465m for the current financial year. Chief executive John Foley sees sustainable growing dividends as a core part of his strategy.
He believes that M&G will fare better once it is independent of the shackles of the Prudential empire.
The feeling is that M&G failed to unlock its full potential during its 20 years of being owned by the Pru, and that it will do better once it is not bogged down in the bureaucracy of a much larger group.
It is looking to expand in Europe and also in the US and Asia, which it was not able to do in its own right under the Pru umbrella. nonetheless, it is likely to have a volatile debut. There is Brexit, of course. And worries over trade wars between the US and China – and now the Eu – are denting investors’ confidence.
M&G is also being saddled with a hefty chunk of debt – £3.2bn – by the Prudential in the demerger. It also has a large closed book of policies that are no longer sold.
ALTHOUGH its long-term track record is strong, there are a few question marks over recent numbers. Profits were down by 12pc in the first half of this year to just under £240m.
As for the funds, one of the best-known, M&G Recovery, is in need of a bit of recovery itself having dropped 10pc in the year to the end of September.
The Optimal Income Fund, run by Richard Woolnough, has also been lacklustre in its recent returns.
This is despite the fact Woolnough has taken home some gargantuan pay packets. He received around £33m in the two years of 2013 and 2014 and is still thought to be taking home enormous amounts. We don’t know how much since his rewards are not disclosed. As a standalone company, M&G needs to be whiter than white on corporate governance.
It cannot credibly lecture the companies in which it invests if it doles out vast sums to its own managers, particularly if their performance doesn’t match up.
The plus side is that it has a strong brand and is well placed to benefit from ageing societies where people need to provide for themselves and are looking for better returns than those available on cash savings.
As an independent entity, M&G could become a much-needed positive force to encourage long-term saving.
Freed of the shackles of the Pru, it could take an activist role on corporate governance as it will be able to speak out on obscene pay and other abuses much more publicly than has been the case.
There is also a golden opportunity to channel capital into infrastructure and green technology to combat climate change.
If M&G gets it right, this is a chance to restore some of the trust squandered in the neil Woodford debacle. After that disaster, the rest of the industry needs to work harder than ever to win back disillusioned savers.