OptimisingAsset management
M&G

‘M&G’s continuing focus on investment performance, combined with its established distribution capabilities, has ensured that the business continued to attract new assets in a period of persistent volatility in world markets.’

Michael McLintock
Chief Executive
M&G

Bar chart - Net investment flows: half year 2011 £2,922m - half year 2012 £4,941m +69%

M&G is the UK and European fund manager of the Prudential Group with responsibility for investments on behalf of both internal and external clients. M&G is an investment-led business whose aim is to generate superior long-term returns for its third-party investors and the internal funds of the Prudential Group.

This is achieved by creating an environment that is attractive to talented investment professionals. Our investment performance has been strong in the face of continued macroeconomic instability. Over the three years to 30 June 2012, 27 retail funds representing approximately 84 per cent of retail funds under management (FUM), delivered first or second quartile investment performance. The performance of our actively managed external institutional fixed income mandates also remains very strong with all of the mandates meeting or outperforming their benchmarks over the three years to 30 June 2012.

In the retail market, M&G’s aim is to operate a single fund range and to diversify the distribution base through a wide variety of channels and geographies. In recent years, this has resulted in significantly increased sales of UK-based funds in European and other international markets.

In the institutional marketplace, M&G’s approach is to leverage capabilities developed primarily for Prudential’s internal funds to create higher margin external business opportunities. This has allowed M&G to offer third-party clients, such as pension funds, an innovative range of specialist fixed income and real estate strategies, including private debt opportunities in leveraged finance and infrastructure investment.

Bar chart - Total IFRS operating profit: 2011 £172m - 2012 £175m +2%

M&G’s continuing focus on investment performance, combined with its established distribution capabilities, has ensured that the business continued to attract new assets in a period of persistent volatility in world markets. Net fund inflows during the first half of 2012 were over £4.9 billion, 69 per cent more than the £2.9 billion taken during the same period last year.

M&G’s total FUM stands at £203.7 billion at the end of the first half of 2012 compared with £202.8 billion at the same point in 2011. Following the reduction in M&G’s stake in its South African subsidiary, on a like-for-like basis, FUM have increased by 2 per cent since the end of June 2011. This reflects strong net sales rather than market movements; the FTSE All Share Index has, on average, been 4 per cent lower over the period. External FUM is up 1 per cent to £94.6 billion and now accounts for over 46 per cent of the total.

Even though demand across the industry for investment funds is subdued and volatility in capital markets remains high, M&G’s strength in depth across all major asset classes has enabled it to continue to attract significant new funds and to increase market share.

M&G

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    AER CER
  Half year
2012
£m
Half year
2011
£m
Change
%
Half year
2011
£m
Change
%

Notes

  1. The 2012 figure represents M&G’s 47 per cent proportionate share in the operating profit (including performance-related fees) of PPM South Africa following the divestment transaction in 2012. 100 per cent of operating profits were included in 2011.
  2. Funds under management includes M&G’s share of the assets managed by PPM South Africa at 47 per cent and 100 per cent for half year 2012 and half year 2011 respectively.
Gross investment inflows 14,701 13,390 10 13,390 10
Net investment inflows:          
Retail business 4,274 2,796 53 2,796 53
Institutional business 667 126 429 126 429
Total 4,941 2,922 69 2,922 69
Revenue 351 329 7 329 7
Other income 3 1 200 1 200
Staff costs (120) (125) 4 (125) 4
Other costs (66) (58) (14) (58) (14)
Underlying profit before performance-related fees 168 147 14 147 14
Share of associate's results (i) 6 13 (54) 13 (54)
Performance-related fees 1 12 (92) 12 (92)
Operating profit from asset management operations 175 172 2 172 2
Operating profit from Prudential Capital 24 27 (11) 27 (11)
Total IFRS operating profit 199 199 199
Funds under management (ii) 204bn 203bn 203bn

Retail

Despite weak investor appetite for risk products, M&G’s Retail business drew £4.3 billion of net inflows, a 53 per cent increase and a figure that exceeds the total annual net sales achieved in 2011. A relative slowdown in retail flows is, however, becoming evident: the second quarter’s £1.9 billion of net new funds contrasted with £2.4 billion in the first three months of 2012.

In our core UK market, retail gross inflows were £6.4 billion over the first half and net inflows were £2.8 billion, representing an increase of 28 per cent on 2011 levels. M&G has been number 1 for gross and net retail sales in the UK over 14 consecutive quarters based on data to 31 March 20121. The business has experienced strong flows in Europe with net sales of almost £2.2 billion, up 142 per cent on 2011 levels. M&G has been the top net selling cross-border group in Europe over the year to end-May 20122. M&G-managed retail FUM sourced outside of the UK exceed £10.5 billion, an increase of 28 per cent on the end-2011 position.

It is a core pillar of M&G’s business that it is able to benefit from changing investor preferences as a result of its diversified product offering. While the appetite for risk products is subdued, demand for M&G’s retail fixed income fund range remains strong. The M&G Optimal Income Fund has been the sixth best cross-border fund for net sales across Europe over the 12 months to end-May 20123.

Some of M&G’s equity funds have bucked the market trend, attracting healthy levels of net sales over the first half of the year. The M&G Global Dividend Fund in particular has been extremely popular with investors in both the UK and in continental Europe and is the tenth best cross-border fund for net sales across Europe over the 12 months to end-May 20123.

No fewer than 13 of M&G’s retail funds, representing all of the main asset classes, each achieved net sales in excess of £20 million in the first half of 2012.

The £5.0 billion of net retail inflows in the UK and in mainland Europe were partially offset by a £0.7 billion net outflow from funds managed by M&G’s associate entity in South Africa. These redemptions were entirely from the PPM South Africa Dividend Income Fund which was closed on 31 March 2012 ahead of the implementation of new tax legislation on 1 April 2012 which would have had a materially adverse impact on the treatment of the distributions made by the Fund to the Fund’s investors. Fund flows into other retail funds of the South African business have been positive.

Institutional

The Institutional business recorded net inflows over the first half of 2012 of £667 million. Investment performance by the business remains strong. Indeed, M&G’s flagship institutional UK corporate bond fund, with over £4.1 billion of FUM as at 30 June 2012, has outperformed its benchmark4 by 1.5 per cent a year over the five years to end-June 2012, a period which includes the onset of the credit crisis.

The quality of investment performance, coupled with an established reputation for innovation, has led to a strong pipeline of new business for the Institutional team.

M&G has accelerated its lending activities since the onset of the credit crisis to support organisations starved of traditional bank loans. The M&G UK Companies Financing Fund, M&G’s loan facility for UK quoted companies, has now made total commitments of £835 million across 10 loans, two of which have been extended during 2012.

M&G’s infrastructure equity investment unit, Infracapital, invested in a consortium (comprising Infracapital and other parties independent of Prudential) that in June signed an agreement to acquire a 90 per cent interest in Veolia Environnement S.A.’s UK regulated water business Veolia Water RegCo, which is the second largest regulated water-only company in the UK. The acquisition represents the first investment for Infracapital Fund II. The Fund recently completed its first close with £305 million of commitments from investors.

Notes

  1. Source: Fundscape. (Q1 issue, May 2012). The Pridham Report. Fundscape LLP.
  2. Source: Lipper FMI. (July 2012, data as at May 2012). SalesWatch. Thomson Reuters.
  3. Source: Lipper FMI. (June 2012, data as at April 2012). SalesWatch. Thomson Reuters.
  4. The benchmark for the Fund is the iBoxx Sterling Non Gilts Index.

'M&G continues to provide capital-efficient profits and cash generation for the Group.'

The first half has seen further growth in profits and improvement in our operating margins. Total revenues for the first half of 2012 were £354 million (2011: £330 million). This represents an increase of 7 per cent. M&G also remains focused on cost control with a cost/income ratio1 of 53 per cent over the half year, an improvement on the 2011 result of 55 per cent. The increased scale of the business following the growth in FUM over recent periods has generated operational efficiencies. Underlying profits at the half year rose to £168 million. This is an increase of 14 per cent compared with the 2011 position of £147 million.

Following the addition of performance-related fees and profit from our associate investment in South Africa, operating profit for the first half of 2012 was £175 million (2011: £172 million). The profit from the South Africa entity represents our proportionate share of its operating profit, which following the divestment transaction in the first quarter of 2012, reduced our ownership from 75 per cent at 2011 year end to 47 per cent. For 2011 and prior periods, the results of the South Africa entity were fully consolidated within our operating profit.

The M&G Group operating margin2 for the period was 47 per cent, continuing the steady improvement achieved over the last four years and ahead of the 39 per cent for the full year to 31 December 2011.

M&G continues to provide capital-efficient profits and cash generation for the Prudential Group. This is in addition to the strong investment returns generated on the internally managed funds. M&G remits a substantial proportion of its post-tax profits to the Group and in the first half of 2012 paid £98 million to the parent company.

Note

  1. Excluding performance-related fees, carried interest on private equity investment and profit from the PPM South Africa entity.

Prudential Capital manages the Group’s balance sheet for profit by leveraging Prudential’s market position. This business has three strategic objectives: to provide professional treasury services to the Prudential Group; to operate a first-class wholesale and capital markets interface; and to realise profitable opportunities within a tightly controlled risk framework. Prudential Capital generates revenue by providing bridging finance, managing investments and operating a securities lending and cash management business for the Prudential Group and its clients.

Markets have remained difficult and volatile in 2012, and as a result the business remains focused on liquidity across the Prudential Group, management of the existing asset portfolio and conservative levels of new investment. Development of new product and infrastructure has continued. This is helping to maintain the dynamism and flexibility necessary to ensure that the treasury and wholesale services remain robust in a period of increased regulatory change, and to identify and realise opportunities for profit within acceptable risk parameters.

Prudential Capital has a diversified earnings base derived from its portfolio of secured loans, debt investments and the provision of wholesale markets services. IFRS operating profit was £24 million in the first half of 2012 (2011: £27 million). In the first half of 2012 a total of £25 million was remitted to the Group.

 
 

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