No longer the top dog

Once the gold standard in life and investments, Old Mutual is struggling to regain its place among its peers

Many top investors such as Allan Gray, Coronation and even Sanlam have chunky holdings in Old Mutual shares, in all cases overwhelmingly bigger than their other life holdings, and usually their biggest bank positions.

The Old Mutual holding has proved frustrating as the share has fallen 20% from its 12month high.

This certainly wasn’t in the script when

Old Mutual CEO Bruce Hemphill announced the managed separation of the business into four parts.

Whatever analysts may think of Hemphill’s time as boss of Liberty, he did make the changes he really cared about, such as the creation of Liberty Financial Services as an inhouse merchant bank.

Mutual’s finance director, Ingrid Johnson, arguably has an even better reputation for implementing change after her time as head of the troubled retail and business banking division at Nedbank.

The fund management houses should push for a palace coup, with Johnson ousting her boss. That would get the share price to change direction.

Johnson believes there are two main reasons that the Old Mutual share price has disappointed. One is that it has not paid a dividend comparable to that of its peer group.

She says it is the responsible thing to do, as the group aims to right-size the balance sheets of the separate businesses. The right-sizing will largely affect Old Mutual Wealth, as Old Mutual Emerging Markets already has a lazy balance sheet with 3.1 times as much capital as it needs.

Nedbank certainly doesn’t need more capital and neither does the group’s American asset manager, OMAM, which has almost been sold.

Liberty and MMI’S dividend yield is more than double Old Mutual’s 2.9%.

Even Sanlam, with a far better history of capital allocation and a much more advanced Africa strategy, pays 3.9%.

Yet at the interim results to June, Hemphill played down any prospect of a special dividend once capital has been redistributed.

Investors aren’t just looking for dividends. After all, Discovery attracts investors on a 1.2% yield, as it has a well-argued growth strategy. “Most of our long-standing shareholders are comfortable with our strategy, but new investors don’t like the hybrid emerging markets/developed markets approach. But then, restoring focus is one of the main aims of the managed separation process,” says Johnson.

Ashburton Investments fund manager Jason Forssman says he is avoiding Old Mutual until there is clarity on the balance sheets of the new businesses and their prospects.

Hemphill has certainly been active over the year to date. The sale of the Italian wealth man- agement business for £210m was completed, the 26% of Kotak Life in India was sold to partner Kotak Mahindra for £138m and the OMAM US holding was reduced from 50.5% to 5% for US$785M.

The head office staff has been cut in half, with annualised savings of £31m.

Now he needs to go out and sell the two new listings in the group: Old Mutual Wealth (see Investor’s Notebook, page 49); and Old Mutual Ltd, previously Old Mutual Emerging Markets. The latter is not exactly a new listing, but the return of the Old Mutual Group to a similar shape as when it listed in 1999.

Potential investors will be pleased to know that the group bought back £273m of debt, and the balance sheets of each of the businesses should be robust when Hemphill unveils the full-year results in March.

Both businesses should list a few months after that. But will they hum like a fine-tuned motor car?

Mainly because of the fall in sterling, adjusted operating profit increased by 37% to £969m.

For once this “adjusting” did not massage the official International Financial Reporting Standards accounting result. This was up 87%.

But Johnson says a more realistic reflection of the underlying performance is the constant currency growth of 6%. It’s a decent performance, but with little wow factor.

Old Mutual Ltd sensibly dropped the grandiose name “emerging markets”. It is by no means a pan-emerging markets business, with 85% of its earnings from SA and most of the rest from African frontier markets.

For a long time Old Mutual has been in denial and living in the past, when the group was dominant and represented the gold standard in life and investments. Gavin Wood, chief investment officer at Kagiso Asset Management, used to work as an actuary at Old Mutual. He describes Old Mutual’s core retail affluent business as “average” and only considers its mass and foundation cluster “good”. In fact, both these units had a mediocre first half, with the earnings of both down 7%.

The star performer for the half was the corporate (employee benefits) business, which was up 20% to