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
ebooksA special investigation by Andy McSmith
  • Get to the point
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

Recruitment Genius: Financial Adviser

£20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...

SThree: Graduate Recruitment Resourcer

£20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...

Guru Careers: Application Support Analyst / 1st Line Support

£25 - 30k: Guru Careers: We are seeking an Application Support Analyst / 1st L...

Guru Careers: .NET Developer / Web Developer

£45K - £55K (DOE) + Benefits: Guru Careers: We are seeking a full stack .NET D...

Day In a Page

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

How a costume drama became a Sunday night staple
Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

Miliband promises no stamp duty for first-time buyers

Labour leader pushes Tories on housing
Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

Aviation history is littered with grand failures

But what went wrong with the SuperJumbo?
Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

Fortress Europe?

Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
Never mind what you're wearing, it's what you're reclining on

Never mind what you're wearing

It's what you're reclining on that matters
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence