A fancy price for a household name

Outlook

THERE MIGHT already have been an American version of the same thing, but as far as Britain is concerned, the concept of a unit trust was invented by a man called Ian Fairbairn sometime before the Second World War and originally sold through a company called Mutual and General. This was the precursor of the present M&G Group.

Despite some ups and downs, and what in recent years has been an alarmingly poor investment performance against many of its peers, M&G remains today the most widely recognised household name in unit trusts. Whether such brand awareness justifies the very full price of pounds 1.9bn Prudential has agreed to pay for it is another matter.

The Pru's Sir Peter Davies is forking out a whopping 35.3 times earnings, or about 10 per cent of funds under management. Using the second yardstick as a measure, this looks expensive against the 3 per cent Merrill Lynch paid last year for Mercury Asset Management.

MAM's investment performance has been nothing to write home about of late either, but it has looked positively sparkling against that of M&G, whose flagship (non) Recovery fund has fallen 8 per cent in value in the last year alone. A recent survey by Bloomberg Money found that few independent financial advisers - traditionally a big source of sales for M&G - were prepared to recommend M&G to clients right now.

Michael McLintock, managing director, claims to have changed the investment approach at M&G quite radically over the past two years, so that there are now trusts for all comers, from trackers to bonds and traditional "value" funds. It is more than possible, therefore, that M&G's present reputation for poor value lags the reality. Even so, the Pru has a hill to climb in persuading the City it has not overpaid.

The price justification lies principally in three things. The first is that M&G, unlike MAM, is primarily a higher-margin retail fund manager and can therefore expect to command a better price. Martyn Arbib's Perpetual, for instance, trades at 11 per cent of funds under management, and that's with no bid premium in the price at all.

The second is scarcity value - there aren't many independent fund management groups of size left to buy. And the third is the enhanced value the Pru might extract by passing M&G through its own distribution channels, and via the greater marketing spend the Pru will be able to put behind M&G's products.

No one questions the Pru's need to diversify in financial services and add new products. To some extent, it already has. As demand for traditional life products has fallen away, the Pru has been active in getting its fingers into a number of different pies. When the price of buying a building society, or newly converted bank, slipped away from him, Sir Peter set up Egg instead as a way of taking the Pru into the deposit and retail banking market.

With unit trusts, PEPs and other forms of retail fund management, he's going the acquisition route. The strategy seems fine, but the price, given the very limited cost savings the Pru plans to extract from the takeover, seems a fancy one.

Super Dow

SO IT LOOKS like Abby Cohen is going to be right after all. "Superbull" Cohen, chief investment strategist at Goldman Sachs, caused much merriment among the stock market bears last autumn, when, at the height of the market turmoil, she predicted that the Dow could hit 10,000 within a year. Ms Cohen has had plenty of good market calls in her time, but this is the one she is likely to be remembered for.

Six months on, with the Dow storming to yet another record high, it's the gloom-and-doom merchants who have been left with egg on their face. Ms Cohen, in contrast, has been fully vindicated. If anything, her predictions are now looking a little on the cautious side.

So the great Wall Street bull market rolls on apace. Or does it? The Dow Jones Industrial Average, to give the index its full name, is far from representative of the US equity market as a whole. It consists of just 30 stocks, many of which, as the name suggests, are at the heartland of traditional US industry.

Other US stocks, particularly smaller companies, are faring less well. The Russell 2000 index of small-cap stocks, for example, is languishing almost 20 per cent below the high it hit in the spring of 1998.

And among the bigger boys, the Dow Jones Transport Average is trading more than 10 per cent below its 1998 peak. Internet stocks, too, are beginning to fall out of favour. Amazon.com, once the market's darling, is now around 25 per cent off its highs.

In other words, the Dow gives a quite misleading impression of what is happening to US equities more generally. Nearly all stock prices have recovered markedly from last autumn's wobble, but the bulk of the market by number, if not value, remains subdued.

The same cannot be said for the rest of the US economy. Judging by yesterday's retail sales figures, the boom continues apace, with no sign of a let- up. The consequence of this is that eventually inflation will pick up again in the US - no economy can withstand such an acceleration in the pace of spending without generating some price pressures somewhere. Any resurgence in inflation is bound, by prompting a rise in short-term interest rates, to put the brakes on the Dow's recent breathtaking pace of growth.

Unfortunately, predicting that eventually there will be a prolonged setback in the Dow is the easy bit. Much more difficult is to pinpoint the timing and depth of any such correction. In the meantime, it is hard to disagree with the seemingly infallible Ms Cohen that the Dow bull has got a little bit longer to run yet.

Electric defence

MICHAEL STODDART, chairman of Electra Investment Trust, has stirred the pot and come up with a really quite decent defence against 3i's unwanted pounds 1.2bn bid.

For Mr Stoddart, this takeover battle is about more than just money. Electra is very much his own brainchild. He has invested much of his life's work in this company, which was founded in 1973. Over the years, Electra has contained some fabulous investments.

It has always irked him that 3i manages to trade at a premium to assets, while his own baby languishes at a chunky discount. Over the years, this difference hasgnawed at his soul. When 3i made its surprise bid in January, it therefore seemed more like an insult than an offer.

So he is desperate to see the invader off. Net assets have been valued at 915p a share and there's to be a tender offer to buy back 40 per cent of the trust's capital. You never really know what a venture capital trust is worth, since its investments are largely unquoted. One person's guess is as good as another's. But if 3i is prepared to pay 705p in paper and cash, it is a racing certainty that it is worth quite a lot more.

The judgement investors have to make is whether 786p a share for 40 per cent of their holding, plus their remaining holding in the highly geared rump, is worth more than 705p for the whole. The market is right to say that it is.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Mortgage Advisor - OTE £95,000

£40000 - £95000 per annum: Recruitment Genius: This is an exciting opportunity...

SThree: Trainee Recruitment Consultant

competitive: SThree: Are you passionate about sales?Do you have a keen interes...

Recruitment Genius: Loan Adviser - OTE £30,000

£17000 - £30000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Day In a Page

Greece debt crisis: EU 'family' needs to forgive rather than punish an impoverished state

EU 'family' needs to forgive rather than punish an impoverished state

An outbreak of malaria in Greece four years ago helps us understand the crisis, says Robert Fisk
Gaza, a year on from Operation Protective Edge: The traumatised kibbutz on Israel's front line, still recovering from last summer's war with Hamas

Gaza, a year on from Operation Protective Edge

The traumatised kibbutz on Israel's front line, still recovering from last summer's war with Hamas
How to survive electrical storms: What are the chances of being hit by lightning?

Heavy weather

What are the chances of being hit by lightning?
World Bodypainting Festival 2015: Bizarre and brilliant photos celebrate 'the body as art'

World Bodypainting Festival 2015

Bizarre and brilliant photos celebrate 'the body as art'
alt-j: A private jet, a Mercury Prize and Latitude headliners

Don't call us nerds

Craig Mclean meets alt-j - the math-folk act who are flying high
How to find gold: The Californian badlands, digging out crevasses and sifting sludge

How to find gold

Steve Boggan finds himself in the Californian badlands, digging out crevasses and sifting sludge
Singing accents: From Herman's Hermits and David Bowie to Alesha Dixon

Not born in the USA

Lay off Alesha Dixon: songs sound better in US accents, even our national anthem
10 best balsamic vinegars

10 best balsamic vinegars

Drizzle it over salad, enjoy it with ciabatta, marinate vegetables, or use it to add depth to a sauce - this versatile staple is a cook's best friend
Wimbledon 2015: Brief glimpses of the old Venus but Williams sisters' epic wars belong to history

Brief glimpses of the old Venus but Williams sisters' epic wars belong to history

Serena dispatched her elder sister 6-4, 6-3 in eight minutes more than an hour
Greece says 'No': A night of huge celebrations in Athens as voters decisively back Tsipras and his anti-austerity stance in historic referendum

Greece referendum

Greeks say 'No' to austerity and plunge Europe into crisis
Ten years after the 7/7 terror attacks, is Britain an altered state?

7/7 bombings anniversary

Ten years after the terror attacks, is Britain an altered state?
Beautiful evening dresses are some of the loveliest Donatella has created

Versace haute couture review

Beautiful evening dresses are some of the loveliest Donatella has ever created
No hope and no jobs, so Gaza's young risk their lives, climb the fence and run for it

No hope and no jobs in Gaza

So the young risk their lives and run for it
Fashion apps: Retailers roll together shopping and social networking for mobile customers

Fashion apps

Retailers roll together shopping and social networking for mobile customers
The Greek referendum exposes a gaping hole at the heart of the European Union – its distinct lack of any genuine popular legitimacy

Gaping hole at the heart of the European Union

Treatment of Greece has shown up a lack of genuine legitimacy