Waking giant savours big breakfast

M&G was the slumbering beast that awoke. Over the past 18 months it has delivered strong performance, says Jonathan Willcocks, head of discretionary sales. Adam Lewis reports.

The last time Fund Strategy profiled M&G (March 14, 2005, page 30) the group was referred to as a sleeping giant that appeared to have “woken up”. This followed an improvement in the performance of its equity fund range, after the arrival of David Jane as head of equities in September 2002.

The problem most sleeping giants have, however, is to convince the outside world that they have really woken, instead of just having the odd stir. Well, in the case of M&G it would appear the beast has woken and is now having its cornflakes.

According to Standard & Poor’s, over one year to March 7, 2005, 29 of M&G’s 44 funds were ranked in the first or second quartile of their respective peer groups. Over three years, 21 out of 38 funds were ranked in the top half. Moving forward 14 months, over both one and three years to May 15, 2006, 30 funds are ranked first or second-quartile, with 44 having a one-year track record and 43 with track records of three years.

Jonathan Willcocks, head of discretionary sales at M&G, says the sustained run of performance led to solid growth in the business over the past 18 months, and provides a strong platform to continue doing so. At the end of March 2006, according to the Investment Management Association, the group had total UK retail assets under management of 13bn, making it the eighth largest group in Britain.

“Every week more of our funds are getting on to people’s buy lists,” says Willcocks. “Retail sales in 2005 were the highest in the group’s 75-year history, with gross retail fund flows of 3.8bn. This was almost double the number we achieved in 2004. In the first quarter of this year, gross fund inflows were 2.9bn, an increase of 39% on the same period last year.”

Mark Dampier, head of research at Hargreaves Lansdown, notes the strong performance at M&G and says there are a number of potential future star managers at the group. Among them he lists Aled Smith (Global Leaders), Simon Murphy (UK Growth), Simon Bailey (Smaller Companies), Mike Felton (UK Select) and Graham French (Global Basics).

He says: “The performance of M&G’s managed funds act as a shop window to show just how well they are doing, as they are all fettered funds of funds.”

Managed by Jane, the Managed and Managed Growth funds are both ranked first-quartile over one and three years to May 15, according to S&P.

Despite this, however, Hargreaves Lansdown only has three M&G funds on its Wealth 150 list of recommended funds, none of which are UK equity portfolios. Only Global Basics, High Yield Corporate Bond and Strategic Corporate Bond make it onto the list.

Dampier says: “While M&G has a reasonable fund offering, its biggest problem is to unseat the funds already on our recommended lists, which have performed better for longer periods of time.”

Dampier also questions M&G’s wisdom in having the seven funds listed in the UK All Companies sector.

Willcocks says the range of UK equity funds will be cut down to six from June 23. This follows the recent unitholder approval of the merger of the 204m Blue Chip fund into the 285m UK Growth. “We have identified four core funds that people want to buy from our UK equity range and these are our main offerings,” he says. “These are Tom Dobell’s Recovery fund, Felton’s UK Select fund, UK Growth and Smaller Companies.”

Bambos Hambi, fund of funds manager at Gartmore, holds Felton’s UK Select fund as a core holding across the group’s range of multi-manager funds. Hambi says he held money with Felton – who joined M&G from Isis (now F&C) in January 2005 – when he was at his former employer.

He says: “I have kept in close touch with David [Jane] and have been impressed with the turnaround he has overseen. When Felton was recruited it gave me even more confidence in the group. When I was told he had shaped the portfolio to how he wanted it, we supported the fund.”

Indeed, since investing in UK Select, Hambi adds, it has been one of his best-performing underlying funds.

In terms of the group’s fixed income funds, Willcocks says its three key funds for retail investors are M&G Corporate Bond, Strategic Corporate Bond (both managed by Richard Woolnough) and High Yield Corporate Bond (run by David Fancourt). “M&G was the group to pioneer both the corporate bond and latterly the high-yield corporate bond concepts,” says Willcocks. “Last year we also became the first group to allow investors to access leveraged European loan markets, via the M&G European Loan fund.”

The Dublin-domiciled fund, which is structured as a Qualified Investor Scheme, has so far raised E182m (124m) since its launch in August last year, according to Willcocks. However, while being aimed at the discretionary market, the fund has a minimum investment of €250,000.

In terms of other fund developments, in July last year the group launched the M&G North American Value fund, which is managed by Prudential’s Richard Broody. To date the fund has raised 57m.

In November the group also launched the M&G Property Portfolio. Structured as a unit trust, the fund invests in a portfolio of about 65 British commercial properties, across the industrial, office and retail sectors.

Managed by John Cartwright, head of retail funds at Prudential Property Managers, the fund is the onshore version of the Guernsey-domiciled M&G Property fund, which launched in March 2004. To date the offshore fund has accumulated 550m in funds under management.

In another development, at the start of this month Alex Odd took over the management of the 285m M&G Income fund from former manager Hak Salih, who left the company as a result. Odd joined M&G in February last year from Jupiter, where he was assistant to Anthony Nutt.

“Since joining Alex has worked on our Extra Income fund with manager Richard Hughes,” says Willcocks. “He has a strong pedigree running equity income money and we think he will be a real asset for the company.”

Meanwhile, Jonathan Parker, manager of the equity component of the M&G Income and M&G Recovery investment trusts, also left the group last month. This followed the hire of Nick Evans, former manager of the 180m DWS Blue Chip fund at Deutsche Asset Management.

Hambi welcomes the change on the equity income desk. “It’s interesting that the group’s only underperforming funds were the equity income ones,” he says. “By changing the manager, it shows how committed the group are to performance.”

Approaching four years after taking the reins as head of equities in September 2002, Jane has turned around the fortunes of the group’s equity funds. Let sleeping giants lie? Perhaps not in M&G’s case.

M&G (formerly Municipal & General Securities) was founded in 1901 as the financial arm of a British engineering company. In 1931 it launched Britain’s first unit trust. M&G was acquired by Prudential in 1999 and is now the investment arm of the group. Assets under management at March 31, 2006, totalled 156bn, 16.5bn of which was retail funds.