M&G chief John Foley battles to restore growth

John Foley, chief executive of M&G, swings an axe to relieve the stress of running an underperforming £367bn savings and investment business.

“Chopping logs is serious exercise,” says the media shy Foley, whose career spans National Australia Bank, Hill Samuel, the British merchant bank, and the UK’s Prudential insurance group.

The 64 year old, who took the top job at M&G in 2017, rarely grants interviews. “I will be interested to see how this goes,” he says in evident discomfort as our video interview starts.

M&G has had a torrid time under his leadership with its share price down 8.6 per cent since its flotation in October 2019. It split from its parent Prudential after the insurer decided to focus on its operations in Asia and Africa.

M&G operates in 28 countries offering actively managed equity and bond funds, and real estate and infrastructure products. Its multi-asset with-profits funds, which smooth returns, have won popularity among retirement savers.

But the FTSE 100 investment group has suffered from shrinking profits and big investor outflows in recent years as well as the nagging embarrassment caused by the suspension of a £2.5bn property fund in 2019.

M&G hopes to reopen the property fund before the end of the second quarter after raising cash from asset sales. Although 30 per cent of the fund’s charges were waived during the suspension, some observers have questioned why M&G continued to extract any fees.

“We are trying extremely hard to deliver as good an outcome for customers as we possibly can. It has impacted our reputation and I absolutely understand people’s consternation,” says Foley. “Property does not lend itself to daily fund dealing and the suspension was necessary to protect customers’ interests.”

M&G has found investor appetite is very limited for property funds with longer notice periods of 90 days.

Better performance across M&G’s fund range is urgently required to staunch the haemorrhaging of investor outflows that increased from £8.9bn in 2019 to £13.2bn last year.

Measured over three years against its peers, 31 per cent of M&G’s fund range ranked in the bottom quartile for performance in 2020, up from 18 per cent in 2018. Just 11 per cent of M&G’s fund range ranked in the top performance quartile over three years in 2020, down from 55 per cent in 2018.

After an in-depth review, M&G has cut fees across its UK retail fund range and closed underperforming products.

Using more data and analytics, and bolstering the teams supporting portfolio managers has produced an improvement in short-term performance measures, says Foley.

He points out that 76 per cent of M&G’s funds were above the median performance of their peer group over the previous three months in February, up from 16 per cent in the first quarter of 2020.

“It is still early days but the direction of travel is the right one,” says Foley.

In common with a growing number of asset managers, M&G has committed to achieving net zero carbon emissions by 2050 in line with the Paris Agreement and accelerated the development of new strategies with a strong focus on sustainability. 

A 25 strong team will run a new sustainable private assets strategy, branded Catalyst, with an initial £5bn from M&G’s with-profits fund. A new £500m partnership was announced this month between M&G and Hyde Housing to create more than 2,000 affordable, sustainably designed, homes in London and Kent.

The M&G Shared Ownership fund was launched with £215m provided by Cambridgeshire and Northamptonshire Local Government Pension Schemes as well as Homes England, the government-backed agency, alongside M&G and Hyde.

“This is a great example of how M&G can channel institutional capital into sustainable investments that will make a positive difference to the lives of people who need good quality, affordable homes,” he says.

M&G is also planning later this year to launch a sustainable version of its flagship £55.5bn PruFund, a suite of multi-asset strategies that smooth returns.

“We hope the new PruFund Planet strategy will be a game-changer,” he says.

His plan is to make the PruFund range available to a wider range of financial advisers and savers via the creation of a new wealth arm. M&G acquired the Ascentric adviser platform in September from Royal London, a deal that brought £15.5bn of additional assets under management and advice, 95,000 new customers and relationships with more than 4,000 advisers.

“The Ascentric acquisition will accelerate M&G’s expansion into wealth management. It is going to be a great platform for us to sell the PruFund range,” he says.

The changes have “laid the foundations for a return to growth”, says the father of four.

Results published this month showed M&G’s adjusted operating profits, the company’s preferred measure of profitability, down from £1.15bn in 2019 to £788m last year. That outcome was about 7 per cent higher than the consensus forecast by City analysts. In 2018, adjusted operating profits were £1.62bn.

M&G’s shares currently yield about 9 per cent and it has set a target of generating £2.2bn in capital by the end of 2022, which would allow it to maintain or increase its dividend payout.

Andrew Sinclair, an analyst at Bank of America, says M&G is set to return 52 per cent of its market value to shareholders through dividend payments by the end of 2025. He also believes M&G’s financial position could be strong enough support a £500m share buyback in 2022 or the following year.

“M&G’s cumulative dividend yield over the coming years stands out against its peers [Aviva, Legal & General, Phoenix],” says Sinclair, who has a “buy” recommendation.

Analysts have also questioned whether M&G should sell its profitable Heritage business, which holds £134bn in assets in traditional with-profits funds and annuities in the absence of any plans to grow this back book.

Cash-generative investment management companies, such as M&G, are also in the sights of acquisitive private equity managers.

A PE buyer could snap up M&G, which has a £5.2bn market value, and chop off parts of the business, such as Heritage, to finance a buyout.

Foley says M&G is “happy with its current structure.” But “if options come along that are attractive” then M&G would examine whether they provided value to shareholders.