Long ReadMar 22 2023

What’s next for M&G?

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What’s next for M&G?
M&G is looking to reduce its cost base by £200mn, with a particular focus on cutting costs within its asset management business. (Photo: Giallo/Pexels)

The demerger of M&G from Prudential in 2019 meant that the oldest UK fund management business was to be restored to independent status, but in an era of mammoth fund houses and the growth of passive investing, can the company that launched the first unit trust in the country in 1934 survive?

As with so many other companies of its size in the UK, takeover speculation swirls around the firm, with Schroders and Australian bank Macquarie reported to have looked at the investment company.

But M&G has also been an acquirer of businesses, taking over advice firm Sandringham and the Ascentric platform.

In the most recent set of results, M&G chief executive Andrea Rossi spoke of a desire to reduce the company’s cost base by £200mn, with a particular focus on cutting costs within its asset management business. 

He says the aim will be to achieve these cost cuts through “digitalisation, reducing layers of management and simplifying governance”.

One wealth manager, who did not wish to be named in order to protect business relationships, says an issue with M&G in recent years has been the company’s tendency to rely on high-profile individual fund managers, an approach which many other firms have abandoned in favour of emphasising a house style and a team-based approach.

The wealth manager says: “There is no house style, so it is all about the individual managers. They toyed with the notion of star managers — which never works for big houses — letting Tom Dobell on Recovery and Richard Woolnough on Optimal gain very high profiles (and pay packets). Both have not ended well.”

Dobell ran the M&G Recovery fund until 2020. Its assets shrank from £6.4bn in 2014 to £1.2bn at the time the fund manager quit. Woolnough brought headlines upon the company when it was revealed that in 2013 he was paid £17.5mn, and sums higher than that in subsequent years.

Woolnough runs the M&G Optimal Income strategy, which at one time was the largest fund in the UK, with its initial growth driven by the manager having exited bank bonds shortly before the global financial crisis, meaning his then small fund performed strongly and grew to have assets of more than £23bn by 2018, a year in which he was paid £16.6mn.

Richard Woolnough’s M&G Optimal Income fund was at one time the largest fund in the UK.

At around the same time that Woolnough’s fund was growing, two of M&G’s equity flagships, the Global Basics fund and the M&G Recovery fund, went into a tailspin. Both strategies were heavily exposed to commodities, and when prices declined so the performance of those funds also fell. 

The Global Basics fund also went through several manager changes and it eventually changed its name to Global Themes.

Ben Yearsley, investment director at consultancy Fairview, says the equity fund offering at M&G struggled for many years “but has turned a corner in recent years”.

Chelsea Financial Services managing director Darius McDermott says: “We are fans of the fixed income team, and of the global dividend fund. But more generally, the equities side of the business has changed a lot over the past 10 years. There is a lot more focus within it now and the improvement in investment performance has come with that.

“Some people might say the problem was that they stuck with some fund managers for too long, but it should also be said that those managers had in some cases delivered more than 10 years of outperformance, and it was reasonable for the company not to wish to dismiss managers for a couple of years of underperformance. 

The positive sentiment of Yearsley and McDermott towards M&G’s fund range may also be reflected in the fact that the latest accounts show the company’s products received net inflows from financial advisers and wealth managers of around £10mn a week in 2022. 

Numbers crunched 

In profit and loss terms, M&G’s story is not dissimilar to that of rival company Abrdn, with an operating profit of £529mn for the whole business wiped out by exceptional items and turned into an accounting loss of £1.6bn. 

Those losses are as a result of having to revalue certain parts of the annuity book, where prices fell as a result of higher interest rates, and similar falls in the value of derivatives used to hedge currency risk. As these assets do not need to be sold, they are just paper losses.

Both M&G’s operating profit number and the accounting profit figure are lower for 2022 than in 2021, with the drop in total assets under management of £28bn, to £342bn, contributing to a drop in fee income received. 

M&G is divided into three business units: Heritage, which is the legacy individual and corporate pensions, annuities, life, and savings business; the wealth business, which incorporates the Ascentric platform and Prufund; and the asset management business.

We are also exploring ways in which we can support selected defined benefit pension funds as their needs evolve, providing innovative insurance solutions by drawing on our investment expertise, financial scale and annuities experience Andrea Rossi, M&G

In the company’s annual accounts, credit was also given to Prufund for the net inflow of £200mn into the wealth business in 2022. It is also at the centre of one of the growth initiatives the company is targeting, with versions of these portfolios being launched in Italy and Ireland. Prufund is now £58bn in size, the entire asset management unit is further £150bn. 

That £200mn of net inflows for Prufund compares with a £1.4bn net outflow from the division in 2021. 

The broader target for the business is for wealth and asset management to contribute more than half of the total company profit by 2025. 

The asset management business will shortly have a new chief executive, with Joseph Pinto, formerly of Natixis Asset Management, replacing Jonathan Daniels in the role. 

Consolidated gains 

Within the wealth management business, Rossi says the intention is to continue to expand the Continuum Financial Services network it operates. He adds: “We are also exploring ways in which we can support selected defined benefit pension funds as their needs evolve, providing innovative insurance solutions by drawing on our investment expertise, financial scale and annuities experience.”

Rossi adds that the appeal of this business model of the advice and platform units is their ability to generate revenue that is less sensitive to market movements than the revenue from asset management. 

This is something Jefferies equity analyst James Pearse, in a note seen by sister title the Financial Times, views as a positive for the company if it can be achieved.

His view is that the heritage business, being lower margin, is dragging down the valuation of the group, and if it became less proportionately reliant on the heritage business for revenue and profit, then the company's valuation could rise markedly.  

M&G is one of the oldest companies in the UK market, and as it spreads its wings into other parts of the industry it is likely to become even more consequential for advisers in the years to come. 

 David Thorpe is investment editor at FTAdviser