A fancy price for a household name
Friday 12 March 1999
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.
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.
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.
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