Interactive Investor

Investors back M&G despite baptism of fire

12th August 2020 12:22

Richard Hunter from interactive investor

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Since the Prudential split, M&G has tackled Brexit issues, an election and a Covid-19 market crash, but stands strong.

It has been something of a baptism of fire for M&G (LSE:MNG) following its demerger from Prudential in October last year.

Headwinds included initial uncertainty leading up to the December general election, especially with Brexit in mind, the temporary suspension of its Property Portfolio Fund and the plunge in markets during March.

The pain was felt particularly in the Retail Asset Management part of the business, with outflows of £5.6 billion in the first quarter. 

Although the pace declined in the second quarter, the half-year total of £7.7 billion of outflows is a concerning figure, not only in terms of lost business but also in being reflective of how some retail investors traditionally react to market volatility, namely by heading for the exit, which is also something for the company to consider in future downturns.

Meanwhile, margins in that space remain under pressure given the ongoing rise of cheaper alternatives such as passives. Capital generation across the group remained high but was more than offset by market movements.

Assets under management were similarly affected, dropping to £339 billion from £352 billion at the turn of the year. Adjusted operating profit fell 57% in the period to £309 million, with the outlook remaining equally challenging until such time as economic normality returns.

M&G has been making adjustments where possible to mitigate these impacts. Its digital transformation aims to benefit from annual savings of £145 million by 2022. Buying Ascentric gives it access to higher value wealth management and indirect access to over 90,000 customers. The institutional business enjoyed inflows of £3.6 billion in the period. 

In the meantime, the group’s financial position is strong, with a solvency ratio of 164% being above the required comfort level, even though it also represents a decline from a previous figure of 176%.

While the dividend will not be increased until the true effects of Covid-19 are known. The dividend yield is currently around 7%, excluding the previously announced special dividend. 

This level of yield is punchy enough, but compared to the interest rate backdrop and the current dividend drought it becomes even more compelling for income-seeking investors.

Indeed, there seems to have been a dash to cash during the pandemic, with many looking to set money aside given the wider uncertainty. 

However, this can be something of a false economy once the debilitating effects of inflation and lower savings rates are taken into account, such that any move to investments for the longer term could benefit the likes of M&G with its suite of suitable products.

The shares have had a strong recovery of late, having risen by 35% in the last three months. However, this cannot mask the fact that the price remains down 27% overall in the year to date, as compared to a decline of 18% for the wider FTSE 100.

Even so, the longer-term prospects for the company against a backdrop of a population increasingly aware of its need to save and invest for the future means that the previous market consensus of the shares as a ‘buy’ is likely to hold firm.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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