Fund Managers 'welcome' M&G Prudential Demerger Despite Analysts Flagging Potential Risks

Last Wednesday, Prudential's shares jumped 5% on the news it would be splitting its business to create two separate companies each with their own distinctive investment propositions, London headquarters and independent listings on the London Stock Exchange.

M&G Prudential has been lined up to be "an independent, capital-efficient UK and Europe savings and investment provider", while Prudential is aiming to be "a leading international insurance group focused on high-growth opportunities in Asia, the US and Africa".

The demerger, which remains subject to shareholder and regulatory approval, will leave existing shareholders with holdings in both companies following the split.

M&G Prudential will be led by its current chief executive John Foley, and will continue its drive to become a more customer-focused business targeting growing demand for comprehensive financial solutions, while Anne Richards will remain in her role as CEO of M&G Investments. Prudential will be led by current group chief executive Mike Wells. 

'Poor orphan'

Commenting on the demerger, Iain Wells, investment manager on the UK equities teams at Kames Capital, which has 5.2% invested in Prudential in the UK Equity fund, said the proposal was a positive for the M&G Prudential business, which had been viewed as the "poor orphan" of the group by investors.

He added the spin off would enable the company to be run as a growth business in its own right and focus on its asset management offering. 

"The demerger is a good thing," Wells said. "I like the proposal to demerge into two parts because the UK business has been seen as a cash-cow, under managed and ignored. By having a separate listing it will be able to focus on running its business.

"It has been the impression for a while the UK has been the poor orphan that did not get a lot of attention and was squeezed of cash [by the rest of the organisation] rather than being run as a growth business in its own right."

It was also announced last week that as part of the demerger process Prudential has sold £12bn in annuity assets to reinsurance business Rothesay Life with the transfer due to complete by the end of 2019. 

Wells said the sale of annuity assets would free up capital, which could be used throughout the rest of the operation.

Echoing the comments, Will Riley, co-manager of the Guinness Global Money Managers fund, said M&G will increasingly focus on active fund management as it looks to capitalise on the shift in the UK from defined benefit (DB) to defined contribution (DC) pension schemes.

He added: "We applaud this strategic focus, as it represents a significant opportunity, but really the demerger seems to have taken place to unshackle the faster-growing Asian/US/African divisions of Prudential." 

Although the UK and European operation should see more "pedestrian growth" compared to the Asian business, Stephen Bailey, co-manager of the Liontrust Macro UK Growth fund - which holds 4.7% in Prudential - said he expected to see earnings multiply from the current level of 13x to 14x earnings.

"Prudential's divorce will be anything but unhappy," Bailey said. "Although it will not come to fruition until 2019, we think the demerger is a smart strategic move that can unlock significant shareholder value."