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Investors may be missing a trick and ignoring M&G’s unique positioning and growth potential
Thursday 23 Jan 2020 Author: Martin Gamble

We think most investors haven’t woken up to the value creation potential on offer from financial group M&G (MNG).

Its shares are starting to move upwards following a demerger from Prudential (PRU) last year and it is now a member of the FTSE 100.

A study by Deloitte and The Edge reported that since 2000, spin-offs have generated 10 times the average gain of the MSCI Index during their first 12 months independent of the parent.

Interestingly, M&G trades on nine times forecast earnings while offering a dividend yield of 7.5%. The PE rating looks too cheap given the company’s unique positioning and growth potential.

M&G has £341bn of assets under management and administration, around 5.5m retail clients and over 800 institutional clients. The distribution platform is global and serves 28 markets from
20 offices.

What may come as a surprise is that funds under management have doubled over the past 10 years. This has been driven by growth in third party mandates in retail as well as institutional funds. But the standout performer has been the PruFund, the UK’s largest ‘with-profits’ fund, which has grown to £50bn from less than £1bn in 2008.

With-profits funds pool customers’ money and smooth investment returns based on a long-term expected growth rate. When returns are better than expected, the surplus is put to one side and used as a buffer in times of market stress.

This has proven very popular with clients who want exposure to equity markets but with lower volatility. The ability to smooth returns is supported by the current surplus of £13.3bn which can be released in the event of market stress. This also gives the mangers more flexibility to take advantage of period market ‘dislocations’.

Profits from this part of its business could provide a significant uplift to M&G’s earnings in future years.

While fees have come under pressure in the asset management businesses, performance has improved in the last two years with 75% of funds in the top half of the peer group over rolling three years. This represents an opportunity to grow the international segment.

You may have heard about one of its property funds being suspended pending the sale of some buildings. This is negative from a reputation perspective but not disastrous for the business as a whole.

SHARES SAYS: Spin-offs can be a lucrative hunting ground and M&G has unique merits and growth opportunities not reflected in the valuation of the business.

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