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Questor: neither Woodford nor the election should rock M&G, so buy for the 8pc yield
Questor: demerged last month from the Pru, the newly independent fund manager has some reliable sources of income
There are those who think the general election will lead to a clear majority for the Conservatives, a clean Brexit in January and a new economic boom to benefit stock markets as pent-up investment decisions finally get made. For everyone else, there is M&G.
The asset manager approached its demerger from Prudential last month with questions about debt levels and how it was going to revive itself after a period of net outflows from the funds it runs.
But now that the split has gone through, markets are warming to the defensive qualities of a business that manages £341bn and is led by John Foley, a Hill Samuel veteran who was the Pru’s chief in the UK and Europe.
Analysts at Deutsche Bank calculate that even in the event of a 25pc fall in stock markets, M&G would suffer only an 8pc hit to capital generation.
They also believe that 90pc of the dividend is covered for the next three years by two reliable sources of income: the with-profits book and annuities, an area closed to new business, which total £131 bn of so-called heritage money. Returns to be wrung from investment decisions taken long ago would appear to be politics-proof.
Since Questor recommended buying the pre-demerger stock in April, very little of the hoped-for “hidden” value has been uncovered. It should prove easier now the two sides have gone their separate ways and the initial trading flurry caused by fund managers adjusting their portfolios is over. “Prudential versus M&G” is presented as an investment choice between growth and income, but it is more nuanced than that.
The Pru’s Asian franchise captures the headlines, and there is mileage in selling life insurance and healthcare to the region’s growing middle classes. It is also true that these appealing characteristics have not set the share price on fire, and that its American operation lacks the same dynamism.
M&G can paint itself as the domestic operation at the back of the budget queue when there were more exotic markets to conquer. Granted its freedom, the management remains sketchy on an investment programme for the asset management arm, which suffered £4.6bn of net outflows in the first half of the year, offset by market appreciation.
Best not to overpromise, but operating profit should be able to bounce back from the 12pc decline to £239m as of June.
Retail margins remain under pressure. The Woodford scandal has dented the reputation of money men (and women) and the reallocation of funds to passive index trackers looks relentless. However, M&G’s performance has been solid, and investors are counting on its appeal to institutions – from which flows have been positive in most of the past six years – continuing.
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Meanwhile, with-profits investments might sound like a blast from the past when endowment mortgages were popular, but M&G reckons its PruFund is a unique platform for savers nearing retirement. It has a £13 bn inherited estate to act as a buffer for investment returns.
Shareholders’ 10pc slice of those returns is released only when policyholders transfer out, so there could be some time to wait.
Analysts at Shore Capital, the broker, have pencilled in annual shareholder transfers of more than £400m in the latter half of the decade and think PruFund can bring in £10bn of new business a year for now, beating the £8.5bn accrued last year. The group wants to push further internationally. Its products are currently being sold in 28 countries across six continents.
All eyes are on the target for cumulative total capital generation of £2.2bn by the end of 2022, which will feed the chunky dividend: the shares yield 8pc. There could be more upside as UK life expectancy forecasts are reined in. Trading on seven times next year’s forecast earnings, M&G looks a better bet than its old rival Aviva.
Call it an insurance policy against whatever could go wrong on the campaign trail.
Questor says: buy
Ticker: MNG
Share price at close: 217p
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