A fancy price for a household name


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
Arts and Entertainment
Brendan O'Carroll as Agnes Brown in the 2014 Mrs Brown's Boys Christmas special
tvCould Mrs Brown's Boys have taken lead for second year?
Members and supporters of the lesbian, gay, bisexual, transgender (LGBT) community walk with a rainbow flag during a rally in July
Chelsea midfielder Cesc Fabregas
footballChelsea vs West Ham live kicks off coverage of all 10 of Boxing Day matches
peopleIt seems you can't silence Katie Hopkins, even on Christmas Day...
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Arts and Entertainment
Jack O'Connell stars as Louis Zamperini in Angelina Jolie's Unbroken
film review... even if Jack O'Connell is excellent
Arts and Entertainment
Madonna is not in Twitter's good books after describing her album leak as 'artistic rape and terrorism'
music14 more 'Rebel Heart' tracks leaked including Pharrell Williams collaboration
Arts and Entertainment
Wolf (Nathan McMullen), Ian (Dan Starky), The Doctor (Peter Capaldi), Clara (Jenna Coleman), Santa Claus (Nick Frost) in the Doctor Who Christmas Special (BBC/Photographer: David Venni)
tvOur review of the Doctor Who Christmas Special
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

The Jenrick Group: Night Shift Operations Manager

£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

SThree: Trainee Recruitment Consultant - LONDON

£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

Day In a Page

A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

Christmas without hope

Gaza fears grow that conflict with Israel will soon reignite
After 150 years, you can finally visit the grisliest museum in the country

The 'Black Museum'

After 150 years, you can finally visit Britain's grisliest museum
No ho-ho-hos with Nick Frost's badass Santa

No ho-ho-hos with Nick Frost's badass Santa

Doctor Who Christmas Special TV review
Chilly Christmas: Swimmers take festive dip for charity

Chilly Christmas

Swimmers dive into freezing British waters for charity
Veterans' hostel 'overwhelmed by kindness' for festive dinner

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all