Profits rose from pounds 67.4m to pounds 76.1m as rising markets yielded high annual management fees in the first nine months of the financial year. Dividends rose 15 per cent to 46p.
The profit jump came in spite of a 7 per cent fall in the value of its funds under management, to pounds 16.8bn. Since the end of September, funds have recovered to pounds 18.1bn.
M&G has been the continual target of takeover rumours following a disastrous investment performance three years ago which has caused investors to withdraw funds from the group.
Michael McLintock, chief executive, declined to comment on whether he had received any takeover approaches, adding: "We think independent companies are more flexible and quicker on their feet.
"We see good long-term prospects in the savings market and we are determined to enhance our position as one of the country's leading independent savings providers."
M&G also suffers from its former success as the world's oldest unit trust company. Last year, a net pounds 111m was withdrawn as customers died and relatives cashed in their inheritance.
One analyst said: "M&G is a company that is having to run faster and faster simply to stand still at the moment. Basically, they have done well to break even."
Mr McLintock, one of the younger members of the family that founded KPMG, has succeeded in boosting sales of investment products in an effort to turn the outflow of funds to an inflow by the end of next year.
After hiring Vivian Bazelgette, a well-known City fund manager, M&G has moved away from its traditional strategy of picking high-yielding, small- cap stocks. New launches have included a high-yield corporate bond fund and an index tracker.
Like other fund managers, the company is now pinning its hopes for the year ahead on a lucrative "closing down sale" for PEPs, ahead of the switch to Individual Savings Accounts next April.
Executives believe M&G is in a good position to attract investors who have become nervous about equities, having established itself as a manager of fixed-interest funds.
However, industry observers are increasingly apprehensive about wider prospects for the sector because of the link between managers' fees and the value of the funds they run.
Because of high fixed costs, the link effectively means that fund managers are a geared play on the performance of the stock market, doing very well during bull runs but very poorly in bear markets.
Many analysts are predicting that M&G's profits will be flat.
At the most they predict a slight rise over the next year if markets deliver growth of 5 per cent. Forecasts range between pounds 75m and pounds 80m for the year to September 1999.
Anthony Cummins, an analyst with Schroders, the investment bank, said: "They are a group that is on the road to recovery but are not yet fully recovered.
"For a group in that position to achieve 15 per cent dividend growth is more than a little improvement. And they will do a little better when the fruits of the recent restructuring are evident."