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M&G and Prudential – life after the divorce

With the demerger now complete, Nicholas Hyett takes a look at what the future may hold for the two groups.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Prudential completed the demerger of its UK life insurance and asset management business last week. That’s left Prudential investors with two sets of shares. Those of the remaining Prudential business, as well as the newly formed M&G.

However, with the two businesses each offering something very different, investors should probably be asking themselves exactly what they want out of their investments following the split.

M&G – much income and little growth

M&G is made up of M&G asset management and Prudential’s UK life insurance business.

The group is looking to pass on a lot of its legacy UK life liabilities. That should leave it managing the assets without taking on the risks inherent in life insurance. That’s a potentially attractive place to be, because compared to life insurance, asset management is a capital light business.

Life insurers have obligations to their customers and meet those by investing the premiums they receive. But because there’s always the risk the investment doesn’t generate the level of return expected, regulators insist life insurers hold a certain amount of capital to meet obligations. Shareholder money is essentially tied up doing not a great deal.

By contrast, the capital requirements placed on asset managers are more limited, since it’s the client taking the investment risk. That frees up cash, which can be returned to shareholders or invested to fund new growth.

Combining conventional fund management with legacy life insurance and a growing with-profits funds business has given the group scale with £341bn of assets under management (AUM) and administration. And in fund management scale is key. Once the costs of running a fund are covered all the extra management fees are profit.

It’s not all plain sailing though. The rise of low cost passive investing has made investors increasingly price sensitive, and active management fees are under pressure as a result. The PruFunds line of with-profits funds is selling well, but the product gets treated with suspicion by many UK investors and the UK is a relatively mature market in any case. Growth in AUM could be hard to come by, and revenue growth even more so.

With the market currently pricing M&G shares for a 7.9% prospective yield, variable and not a reliable indicator of future income, it would seem we’re not alone in thinking growth could be a struggle.

More on M&G, including the latest share price, charts and how to trade

Prudential – Asian adventure

In some ways Prudential is the polar opposite of M&G. It’s firmly focused on insurance, both life and health, heavily plugged into high growth emerging economies and offers a prospective yield of just 3%, variable and not a reliable indicator of future income.

Following the demerger Prudential is largely a play on growing wealth in Asia. State provision of safety nets, such as healthcare, is minimal to non-existent in many markets, and demand for insurance from the burgeoning middle classes is growing rapidly as a result. A focus on regular instalment policies, such as health and life insurance, lends resilience to the Asian business, because most people continue paying their monthly premiums even if the economy falters.

Aside from the core Asian insurance business Prudential has a toehold in Africa, and an Asian asset manager, under the Eastspring brand, which has been growing quickly.

All that growth doesn’t come cheap though and underpinning the group’s ambitious expansion plans is the cash generative US retirement business. Jackson has historically had a leading position in the variable annuities market, and is looking to capitalise on that by selling additional products.

That diversification can’t come soon enough because Jackson, like the rest of Prudential, is very exposed to both the economic cycle and stock markets specifically. Ongoing trade disputes between the US and China is a worrying development for both the group’s key geographies and more recently the US economy is showing signs of slowing.

Prudential is, in our view, now a more focused business with better long term growth prospects. However, having a more focused business also means the company’s lost some benefits from greater diversification, and that could make it a bumpy ride.

More on Prudential, including the latest share price, charts and how to trade

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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