Sleeping giant m&g begins to stir

M&G has been a feature of the investment landscape for some time. It has a comprehensive range of funds and 15.5bn of retail assets. It is known for its fixed interest business, with historical performance of equity funds falling behind market leaders. But performance on the equity side appears improved and M&G is marketing itself more aggressively.

Over the three years to March 7, 2005, 21 out of 38 funds are second-quartile or above, according to Standard & Poor’s. The one-year figures are better, with 29 out of 44 funds in the top half, 18 of which are first-quartile.

David Jane is widely regarded as the catalyst behind the improvement in equity performance at M&G. Since taking the reins as head of equities in September 2002, performance relative to peers has improved.

Identifying what has contributed to this turnaround is no easy task, says Jane: “Have we done it because of a single macro style? Have we been lucky?

“We haven’t been able to identify a macro style that has contributed to outperformance because all our funds are fundamentally different. I believe it comes down to individual managers being focused on beating peer groups with strong, repeatable processes, well supported by good stock selection and risk management.”

Gary Shaughnessy, UK retail chief executive, explains that the investment styles of the fixed interest and equity teams are distinct in many ways. However, he says, the general philosophy is to give managers freedom to use their skills to run funds, supported by dedicated teams of analysts.

Jim Leaviss, head of retail fixed interest, says: “Bond management is about managing the downside. We focus on avoiding the losers rather than picking winners. The buck stops at the fund managers.”

Jane adds: “The focus is on delivering performance by hiring quality talent and giving them support to provide long-term sustainable value to clients.” He explains that fund managers can also draw on expertise from the portfolio management group. However, managers are given the freedom to run funds using their own methods and style and are not dictated to or constrained.

“We are not a single-process firm, but managers know they are judged on performance relative to their peer groups. Fund managers love to be surrounded by talent but don’t want to be told what to do.”

The best-performing fund over three years is Kenichi Ura’s Japan Smaller Companies fund, returning 72.5% (43.2% sector average). The fund is focused on stockpicking and has benefited from investing in internet-related stocks.

Worst is the Global Technology fund, managed by Greg Kerr. The fund lost 32.3% over the period (the average fund in the sector lost 17.8%). The fund is relatively defensively positioned, adopting a long-term outlook.

Perhaps M&G’s approach is one that lends itself to rising markets. The last major trough of the FTSE 100 (below 3300 points) was reached not long after Jane’s appointment and markets have performed buoyantly since. The relatively poor performance before this was in a falling market and maybe the real test of M&G’s equity strength will come at the next turnaround in global stockmarkets’ fortunes.

Richard Philbin, F&C fund of funds director, says: “We don’t currently invest in M&G funds but there are a number we like. They have always been known historically as a bond house, but have been trying to develop their equity side.”

Philbin rates Richard Woolnough as one of the best corporate bond managers in the marketplace. He also likes Graham French’s Global Basics fund and the European Smaller Companies fund run by Giles Worthington. He says: “M&G has been a sleeping giant but now it seems to be waking up.”

Stephen Marriott, senior research analyst at BestInvest, says: “We don’t recommend many of their funds. M&G covers all asset classes and has access to great resources, but we don’t rate many [of the managers] that highly.”

One fund that Marriott recommends is David Fancourt’s European High Yield Bond fund: “It is a specialist fund and the M&G fixed interest desk is well resourced.”

M&G has recently focused on improving performance in the core British equity markets. Jane says: “We are strong everywhere except for the UK All Companies sector.”

To this end the group hired Mike Felton as head of UK equities from Isis Asset Management (now part of F&C). Felton, who joined in January, runs M&G’s Capital fund, and has restructured the fund by reducing the number of holdings. Jane says that M&G needs to improve performance and the onus is on Felton to deliver the numbers. He is confident that Felton can replicate the strong performance achieved at his former employer.

>From a distribution perspective there is no focus on a particular sector in the retail marketplace, explains Shaughnessy: “Our products are aimed at the whole range of intermediaries and fund of funds managers.”

Shaughnessy adds: “We have invested heavily in improving communication between our managers and the multi-manager community. We need to make sure products are relevant to the market. From a distribution perspective, we have been too shy about marketing products and we need to shout a bit louder. More focus is needed in future.”

Leaviss says: “We spend a lot of time meeting with fund of funds managers and marketing to intermediaries.”

M&G was taken over by Prudential in 1999. Prudential’s size and scale allows investment into resources, and its willingness to adopt a long-term view helps finance new projects, says Shaughnessy: “Prudential is willing to support innovation and is not short-termist. It recognises it is not an investment manager and lets us do our job.”

Since 2002, M&G has expanded into Europe, including Austria, Germany and Italy. Sales in 2004 in these countries increased fourfold (compared with 2003) to E611m (425m).

Prudential’s expertise in property allowed M&G to enter the retail property market when it launched its Guernsey-domiciled property fund in 2004. “Being owned by the Prudential gives us access to great resources. Our credit analysis team is one of the biggest in Europe,” says Leaviss.

Leaviss says the fixed interest funds have posted solid performance and there has been a steady flow of money into funds: “Last year was much quieter than 2003, but this was because of the popularity of bonds generally in the market.”

There does seem to be an air of confidence at M&G. “We are now better positioned for sustainable performance in a stronger economic environment,” says Jane. Shaughnessy adds: “It is a growing and ambitious business.”

Whether or not this confidence will translate itself into continued strong performance is uncertain, but M&G does indeed appear to have woken up.

M&G (formerly Municipal & General Securities) was founded in 1901 as the financial arm of a British engineering company. It launched Britain’s first unit trust in 1931. M&G was taken over by Prudential in 1999 and is now the British and European investment arm of the group. Assets under management at December 31, 2004 totalled 126bn, of which 15.5bn was in retail funds.